3 minute read

Attendees at Aviva Investors’ annual institutional investor conference gave their take on some of the key themes impacting pensions schemes, from ESG to asset allocation shifts.

The results from a series of informal polls conducted at Aviva Investors’ recent UK institutional investor conference, 'Adapting to thrive – inspiring future outcomes’, highlighted several trends extending to the broader pensions industry.

Mirroring policymakers, including the Department for Work and Pensions (DWP), attendees recognised that environmental, social and governance (ESG) considerations materially contribute to risk-adjusted returns. The adoption of behavioural finance, however, received mixed results, with nearly half of the respondents seeing it more as a buzzword than a concept to apply to their investment process.

Defined benefit pension schemes are maturing, and most respondents indicated they were currently targeting self-sufficiency over a buy-out as their ultimate objective. In defined contribution, concerns revolved around the need for a smoother connection between the accumulation and decumulation phases for members. ESG and the use of real assets in investment strategies also featured. In total, around 50 pension fund executives, trustees and consultants who collectively are responsible for £360 billion in assets participated in the polls.

ESG duties

Nearly 40 per cent of the attendees see risk mitigation as the main benefit of ESG integration, while about a third saw enhanced investment performance as its main benefit. Steve Waygood, chief responsible investment officer at Aviva Investors, couldn’t agree more. For him, “it is all about enhancing investment returns, by managing risk”.

This is in line with recent conclusions from the DWP, which issued new guidance in September to clarify and strengthen trustees’ duties in considering ESG risks in the investment process. Globally, the International Organisation of Securities Commissions is considering how securities regulators can encourage sustainable investments, while the Financial Stability Board is working on improving corporate disclosures of climate-related financial information to support ESG integration.

Regulators have an interest in ensuring the financial services system can withstand all forms of risk, including ESG. But they’re also responding to increasing investor pressure, demanding that sustainability be better integrated into investments. According to Waygood, responsible investing is about shaping the future that pension scheme members really want to retire into.

Beyond the behavioural buzzword

Behavioural finance is the latest buzzword and has little impact on schemes’ investment process, according to 44 per cent of the attendees. This result may be surprising to some, given the steady rise to prominence of behavioural science in the past decade, according to Greg Davies, head of behavioural science at Oxford Risk.

In a separate question, however, 67 per cent of the audience agreed that that they are “already consciously applying behavioural finance in practice”. Taken together, these two figures imply some schemes that are applying behavioural finance may not be doing so effectively. This is not surprising: human behaviour is complex, and applying behavioural finance effectively is not simply a matter of running through long lists of biases.

So how can behavioural science move beyond the confines of a buzzword and be a key part of the decision-making process? It is worth recognising that most people essentially face a trade-off between the right thing to do and the comfortable thing to do, Davies said. Investors possess powerful mechanisms geared towards what makes them emotionally comfortable, leading to the tendency to see things through a biased, narrow lens, and potentially bad decisions. Davies argued using a combination of data science, technology and behavioural design can lead to better decisions.

Read more 'Beyond the cave: Behavioural science meets data science'  

End game

Two-thirds of the attendees said their defined benefit (DB) schemes’ ultimate objective is self-sufficiency. The definition varies among schemes but generally involves a modest premium over the cost of funding liabilities with low risk assets such as government bonds. Under self-sufficiency, the pension liabilities remain on the sponsor’s balance sheet, but the pension scheme’s reliance on the sponsor is greatly reduced. A sixth of the respondents are going a step further and targeting buy-out, which removes defined benefit pension liabilities from the company balance sheet altogether. Another 16 per cent haven’t decided what their schemes’ ultimate objectives are, while three per cent chose pension consolidation.

The poll results are skewed towards self-sufficiency, which isn’t fully reflective of the broader pension industry, according to Boris Mikhailov, investment strategist at Aviva Investors. In Mercer’s 2018 European Asset Allocation Survey, for example, only 38 per cent of UK DB schemes are targeting self-sufficiency. The difference may be due to the Mercer survey covering a much larger sample across different size schemes. In contrast, those who attended Aviva Investors’ conference tended to be larger schemes with in-house resources to cater for targeting self-sufficiency. Another reason is that some of the schemes in attendance may simply be too big to do a full buy-out, which has higher expected costs than targeting self-sufficiency, Mikhailov added.

DB for DC

Defined contribution (DC) pension schemes are growing faster than DB, and improving outcomes for members is a key priority for sponsors. Among the participants at the conference, 41 per cent said the biggest change to DC investments over the next three years will be a single accumulation and decumulation solution.

The poll results highlighted a need for an investment platform that spans the whole lifetime of DC savers, said John Dewey, head of investment solutions at Aviva Investors. Traditionally, DC members would build their pension pot in the accumulation phase, then separately go through a decumulation stage in which they decide how to take the benefits, typically including an annuity purchase. A platform that can connect the two may bring about more benefits, particularly if this process can integrate each member’s unique needs and apply them to the right investment strategy to deliver outcomes.    

To further extract efficiency, key themes that are prevalent in DB pensions also can be applied to DC. Conference attendees highlighted two ways to do this: default investment options reflecting investor ESG preferences and improving returns and diversification through allocations to real assets each received 28 per cent of the vote. In the later stages, for example, assets such as private credit may help to deliver predictable income in the decumulation phase in DB, just as they do for mature DB schemes. Best practices in DB can be used with similar positive effects within DC.

Important Information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (Aviva Investors) as at 17 October 2018. Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this document, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This document is not a recommendation to sell or purchase any investment.

In the UK & Europe this document has been prepared and issued by Aviva Investors Global Services Limited, registered in England No.1151805. Registered Office: St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Authorised and regulated in the UK by the Financial Conduct Authority. Contact us at Aviva Investors Global Services Limited, St. Helen’s, 1 Undershaft, London, EC3P 3DQ. Telephone calls to Aviva Investors may be recorded for training or monitoring purposes. In Singapore, this document is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited for distribution to institutional investors only. Please note that Aviva Investors Asia Pte. Limited does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Asia Pte. Limited in respect of any matters arising from, or in connection with, this document.  Aviva Investors Asia Pte.  Limited, a company incorporated under the laws of Singapore with registration number200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1Raffles Quay, #27-13 South Tower, Singapore 048583.In Australia, this document is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd for distribution to wholesale investors only. Please note that Aviva Investors Pacific Pty Ltd does not provide any independent research or analysis in the substance or preparation of this document. Recipients of this document are to contact Aviva Investors Pacific Pty Ltd in respect of any matters arising from, or in connection with, this document. Aviva Investors Pacific Pty Ltd, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business Address: Level 30, Collins Place, 35 Collins Street, Melbourne, Vic 3000

The name “Aviva Investors” as used in this presentation refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom. Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is registered with the Ontario Securities Commission (“OSC”) as a Portfolio Manager, an Exempt Market Dealer, and a Commodity Trading Manager. Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) and commodity pool operator (“CPO”) registered with the Commodity Futures Trading Commission (“CFTC”), and is a member of the National Futures Association (“NFA”).  AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606

RA18/1075/01102019