Big move to sustainability and fixed income amidst rising challenges
In 2024, European defined benefit pension funds are significantly leaning towards fixed income and sustainability, according to a survey conducted by Goldman Sachs Asset Management.
Titled ‘European Pension Survey: Finding Opportunity in Uncertain Markets,’ the survey engaged 126 senior defined benefit pension fund managers and executives throughout Europe to gauge their perspectives on the forthcoming opportunities and challenges.
The consensus points to investment grade debt and private credit as the asset classes poised to deliver the highest risk-adjusted returns in the ensuing year.
The survey reveals that 90 percent of the respondents are planning to either boost or maintain their investments in these classes. Specifically, private credit is viewed favorably, with 68 percent of managers convinced of its potential to offer enhanced returns without a proportional increase in volatility.
Furthermore, 65 percent of the managers are strategizing to allocate towards private credit in the next three to five years, showcasing a robust confidence in its performance.
An insight into the financial health of pension funds shows an uptick in funding ratios, a pivotal metric of their solvency. Europe’s aggregate funding ratio has achieved a commendable 120 percent, while the UK has hit a record high at 134 percent.
This financial stability has prompted a strategic pivot towards liquidity management and risk mitigation, with a significant tilt towards cash allocations. UK-based funds are driving this trend, with all surveyed respondents either increasing or sustaining their cash investments.
In contrast, there is a noticeable reticence towards developed market equities among UK participants, with none planning to up their stakes and 38 percent looking to reduce them.
The survey also underscores the looming shadow of geopolitical risks over European pension funds. Over 70 percent of respondents flagged geopolitical tensions and political events as the paramount risks to their portfolio in the upcoming year.
Regulatory challenges are also on the radar, with 58 percent and 55 percent of funds respectively identifying the Sustainable Finance Disclosure Regulation and upcoming climate stress-testing requirements as complex hurdles.
The Netherlands stands out, with 86 percent of respondents highlighting the transition from defined benefit to defined contribution schemes as a regulatory challenge, emphasizing the Dutch pension sector's focus on adapting to this shift.
Sustainable investing emerges as a cornerstone in the investment strategies of European pension funds, with 87 percent of survey participants considering it a critical or important factor in their decision-making.
This is further evidenced by 63 percent of respondents allocating more than 10 percent of their portfolios to sustainable investments.
The integration of ESG criteria into investment decisions is widely acknowledged for its potential to mitigate long-term risks, with 84 percent of managers affirming this stance and over half asserting that it can generate alpha.
The sustainability themes prioritized include transition risks associated with climate change (75 percent), good governance (61 percent), and human rights (49 percent).
Outsourced investment management is identified as an increasingly essential tool for pension funds grappling with complex compliance requirements and uncertain markets. Seventy percent of respondents outsource some or all their portfolios, indicating a strong reliance on external asset management expertise, particularly in the realm of sustainable investing.
Fadi Abuali, CEO of Goldman Sachs Asset Management International, captures the essence of the current moment for European defined benefit pension fund managers as “pivotal.”
Despite the optimism about the investment climate, the economic outlook remains fraught with uncertainties, including “higher-for-longer rates, divergent growth paths around the world, and elevated geopolitical risk.”
The trend towards investment grade debt and private credit is seen as a strategic response to these uncertainties, aiming for stable income-generation over volatile assets like equities.
Céline van Asselt, head of fiduciary management for Continental Europe, anticipates a rise in outsourced asset management.
