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Embracing illiquid assets Emily McGuire, partner at Aon
More than half of UK defined benefit (DB) pension schemes have reduced the level of equities in their portfolios during the past two years. At the same time, as schemes sharpen their focus on their chosen endgame, diversification into alternative growth assets has increased. This change was one of the key findings from Aon’s 2019 Global Pension Risk Survey, which charts the actions, plans and concerns of UK DB pension schemes. The survey’s results overall trends – of maturing pension schemes and reducing time to reach long-term targets – have had a clear im- pact on schemes’ investment strategies. This is in line with many of the trends we saw in the survey two years ago – notably de-risk- ing and diversification. But this year the difference lies in the pace of change and the level of activity – schemes have firmed up their views and have acted decisively. While this has been driven by schemes’ own circumstances, ac- tions have typically fallen into two categories: schemes that have reduced equity exposure but increased liability hedging to reduce overall volatility, and those that have diversified from equities into alternative growth assets.
Wind the clock back 10 years and equities were typically 50% of a scheme’s investment portfolio. That has changed, with allocations now far lower and with 40% of respondents expecting to reduce that figure further over the next year. Nevertheless, they still need to maintain investment returns – which is where the rise of alter- native growth assets comes in.
GROWING INTEREST IN ILLIQUID INVESTMENTS As schemes look to alternative investment ideas, we have seen a continuing interest in illiquid asset classes. Almost a quarter (23%) of respondents expect to increase or make allocations to less liquid assets. Pension scheme investors are looking for multiple types of illiquid assets and we are seeing the greatest interest in private credit (47%), which includes direct lending to corporates, real estate debt and infrastructure debt. Schemes are also indicating that they ex- pect to increase their exposure to bulk annuities (33%), real estate (27%) and infrastructure (29%).
Anticipated investments in illiquids Farmland and timber Private equity Real estate Infrastructure equity Bulk annuities Private credit 0% 5% 10% 15% 20% 25% 30% 35% 40% 3% 25% 27% 29% 33% 47% 45% 50% Source: AON
32 | portfolio institutional | November 2019 | issue 88
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