Investment outlook has improved, say DB pension schemes

Many defined benefit (DB) pension schemes say the investment environment has improved and indicate they will invest more heavily in private credit in expectation of higher returns for lower volatility.

Nearly 60% of European DB schemes that were surveyed felt there was an improved environment for investing, according to Goldman Sachs Asset Management (GSAM), which also described schemes as “leaning into” fixed income and sustainability in 2024.

GSAM’s inaugural European pension survey covered 126 senior DB pension fund managers and executives based in Europe.

The firm said the respondents were overall “cautiously optimistic” about the year ahead, with investment-grade debt and private credit expected to generate the highest risk-adjusted returns in 2024.

Nine in ten survey respondents planned to increase or maintain these allocations and nearly 70% of respondents believe private credit has the potential for increased returns without a corresponding increase in volatility and 65% plan to increase exposure over the next three to five years.

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The survey also showed that 87% of respondents deemed sustainable investing to be critical or important in their decision-making. Most respondents (84%) believe integrating ESG criteria into investment decisions can help reduce long-term risks, and more than half say this approach can generate alpha.

Disclosure requirements under the Sustainable Finance Disclosure Regulation (58%) and upcoming climate stress-testing requirements (55%) were cited as the most challenging developments for funds to implement.

Another finding of the GSAM research – which is called ‘ European Pension Survey: Finding Opportunity in Uncertain Markets’ – was that the best-funded schemes are allocating significantly more to cash and less to developed market equities, particularly in the UK where all UK-based respondents said they were either increasing or maintaining their allocation.

In developed market equities, no UK respondents plan to increase their allocation, while 38% plan to decrease.

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Fadi Abuali, CEO of Goldman Sachs Asset Management International, said that – given sharp increases in yields and cooling inflation – pension fund managers were leaning into investment grade debt and private credit, while Céline van Asselt, head of fiduciary management, Continental Europe, said more outsourced asset management was on the cards.

“Today, trustees must contend with new regulatory requirements, more vocal stakeholders and rising reputational risks. Pension funds’ resources have not increased to match this complexity. The investment climate remains uncertain, with higher-for-longer rates and slower growth expected in most advanced economies, but opportunities abound in public and private markets for investors with a diversified and risk-conscious approach.”

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