The Global Pension Funds

A pension fund is also known as a superannuation fund in certain nations. It is any plan, fund, or scheme which delivers retirement income.

Pension funds normally have huge amounts of money to invest and are the key investors in listed and private firms. They are particularly critical to the stock market where mega institutional investors dominate.

The Japanese Government Pension Investment Fund (GPIF) is the largest public pension fund in the world. It oversees 139 trillion Yen ($1.24 trillion USD) in assets.

Pension funds can be classified as open or closed pension funds. Open pension funds support a minimum of one pension plan without any restriction on membership while closed pension funds support only pension plans that are restricted to specific employees.

Closed pension funds can be further sub classifieds into:

• Single employer pension funds.
• Multi-employer pension funds.
• Related member pension funds.
• Individual pension funds.

Pension funds can also be classified as public or private pension funds. A public pension fund is controlled under public sector law while a private pension fund is controlled under private sector law.

The difference between public or government pension funds and private pension funds could be difficult to evaluate in some nations. In others, the difference is made sharply in law, with very detailed needs for administration and investment.

In today’s globalized domain of pensions, two issues specify the shape of the future. First, regulatory changes like EMIR and Solvency II in Europe, Dodd-Frank in the US and Stronger Super in Australia are devised to reinstate confidence in the financial sector and protect the interests of end-investors.

Second, demographic issues have resulted in substantial challenges to ensure capability and appropriate member engagement. These issues are driving the three critical international trends of structure, transparency and governance.

At the core of pension structures is demographics (low fertility rates combined with longevity). This shift highlights the critical issue that the proportions of population past the real retirement age are growing while proportions coming into the workforce are decreasing. This trend is resulting in a very dynamic thought process on managing fund adequacy.

Moreover, the US and Europe still have a vast pool of Defined Benefits (DB) pensions. However, other than the US, DB is being largely being surpassed by Defined Contribution (DC).

As the transition from DB to DC moves the risk to participants, there is growing emphasis on how to accomplish better member engagement and a more protected retirement outcome for retirees.

Australia is a prominent model, as it has brought together various stakeholders - government, employers, employees and trade unions to decide on the way forward for its multi-employer super-trusts. On the other hand, in Taiwan, the contribution rate of 12% specifies low member engagement in comparison to other regional markets.

There is also an emphasis, particularly in Asia, on the connection between effectiveness and better returns. Once a fund accomplishes scale, the actual dividend is efficiency, which should result in improved returns. Therefore, the emphasis on efficiency and returns is leading to a transformation in the way funds are managed.

An additional structural concern for pensions is guarantees, which would result in a distribution of risks. The ideal scenario would be for employees to obtain complete contributions along with a nominal return, pensions are also observing how a firm could deliver a minimum level of assurance that it can give back the employee’s contribution and the contribution the firm makes upon the retirement of the member.

As fund become bigger and member participation increases, there is greater emphasis on investment portfolios and returns by the DC investor and regulators. Regulators are seeking more fund transparency and control.

At the same time, improved transparency results in improved control, which would increase overall returns.

Certain markets are also providing advice on the investment strategies and integrating environmental & social program items into their guidelines.

The four issues most significant to managers are:

• Finding yield in a yield-constrained environment.
• Facilitating growth in a low-growth environment.
• Managing portfolio risk and volatility.
• Initiating measures to negate inflation.

Yields are certainly low and growth projections are subdued. The inference is that public markets, fixed income such as high-yield, and emerging market debt still provide excellent risk-return profiles.

As far as the public equity side is concerned, prospects are in international, US and European high-dividend equities with dividend yields around 5 to 6 percent.

Investors must devise risk strategies for deflation as well as inflation. Globally, a critical investment trend for pension funds is de-risking.

Pensions will be subject to increased scrutiny from regulators, greater expectations for fund governance, and increased reporting needs. There would be greater transparency. Technology to support governance and transparency would be a critical differentiator.

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