Over the next five years, European pension funds face the challenge of getting quality portfolio data to understand their total risk exposure and to meet regulatory requirements. However, only 60% of defined benefit plans in a survey felt they have access to sufficient portfolio data to allow them to understand their total risk exposure.
The survey, part of research conducted for State Street by the Economist Intelligence Unit (EIU) revealed 42% of such schemes said they have enough information to be able to gain an insight into the total investment costs. 12% of defined benefit scheme pension funds were somewhat concerned that the quality of their portfolio data is not accurate and 56% percent of European schemes interviewed believe there is still scope to reduce their operating costs, despite the consistent focus on costs.
The research reveals 33% of pension scheme claim its is difficult to keep up with the new regulatory developments in the pensions industry that are relevant to them, a further 46% find it ‘slightly difficult’ to do this, and 21% claim it is not difficult at all. Furthermore, 21% percent did not feel demands from ratings agencies and regulators were a challenge and 31% in Europe said it was a significant challenge.
Sven Kasper, responsible for regulatory, industry and government affairs for State Street in Europe Middle East and Africa said: “Since the financial crisis, there have been substantial changes in the pensions industry in terms of regulation, transparency and reporting, and this has coincided with very volatile markets. Our research findings show that pension funds are under more pressure than ever before as they struggle to keep up with the ever- changing landscape. ”
In addition to upcoming regulatory initiatives such as the Alternative Investment Fund Managers Directive (AIMFD), UCITS V, MiFID II, European Financial Transaction Tax, EMIR, Solvency II, CRD IV and FATCA, the regulations specifically affecting pension schemes are revisions of the Institutions for Occupational Retirement Provision (IORP) Direction on the prudential contains prudential standards, rules on the freedom of movement of capital and the freedom of provision of services in relation to occupational pension funds and the Green Paper on Long-term Investment (published March 2013) which aims to initiate debate on financial system’s ability to channel savings towards long-term investment.
The State Street study findings also highlight key predictions from pension schemes for the next five years. There will be no let-up in the challenges facing funds, as 81% say investment decisions will become more complex in the coming years. 75% of respondents predict that persistent funding challenges will accelerate the closure of defined benefit schemes and the transition to defined contribution vehicles. In addition, 69% of the respondents said that national governments would take aggressive action in an attempt to close the retirement savings gap.
“Clients have moved from a predominately return driven strategy to a more risk-focused strategy,” said Ian Hamilton, head of Asset Owners and European Head of Consultant Relations at State Street. “They are making decisions on de-risking, which is a priority, and whether their risk strategies are appropriate. In terms of the tools they require, we are seeing a demand from clients for risk analytics or for the software to allow them to do it themselves. Additionally, we are also working with consultants to provide those analytics to the client.
“The second area of demand is driven by the client’s investment profile. There is a significant increase in the drive towards alternative strategies. Small allocations to private equity were manageable by on-house teams. As allocations increase the information and operational requirements have become greater and clients are looking to outsource.
“Thirdly, there is an increased trend toward independent derivatives pricing. Collateral management outsourcing to a third party is also popular.
“The large funds have significant internal resources, which affords them more flexibility in terms of strategies they employ. A client’s tendency to outsource has less to do with assets under management and more to do with the size and levels of sophistication of their investment strategies and in-house teams. It is down to the strength of the internal team and view of the sponsoring company.”