More than one-quarter of European pension funds are still targeting well over 6% annual returns net of fees despite the continuing low-yield environment and concerns over its becoming the new norm, research has shown.

The survey – conducted among 190 European pension funds by CREATE-Research – showed that while a slight majority (51%) targeted returns less than 5%, one-fifth aimed for returns of between 6.6% and 8%.

Some 7% of respondents targeted even higher returns than this.

The research, originally published in IPE’s November magazine, shows a changing pattern in the creation of asset allocation models.

Survey and report author Amin Rajan, chief executive at CREATE, said diversity was now a characteristic of asset allocation models.

The research showed schemes shifting away from more traditional methods of allocating assets towards one of three developing methods.

Some two-fifths of schemes used a ‘product-focused’ method, which saw funds operating silo strategies that blend together to achieve positive risk-adjusted returns.

More mature schemes (around 30% of respondents) used a ‘time-focused’ method that saw asset selection focused around capital growth, regular income and inflation hedging, and then a shift towards less risky assets as maturity increases.

The remaining 30% of schemes operated a ‘liability-focused’ strategy that looked to remove risk gradually as funding levels increased.

Alongside the hedged assets and some return-seeking portfolios, funds were likely to invest in cross-assets that provide strong returns with liability-matching features.

Rajan said these changes in models created “new urgencies” for funds’ service providers.

“Without greater collaboration between pension plans, their consultants and their asset managers, the new changes risk being as durable as the crisis that provoked them,” he said.

“It is one thing having new asset allocation models for a new age [but] quite another making them work. It’s time to leverage the collective expertise in the pension value chain.”

For more on CREATE-Research’s report, ‘The Alpha behind Alpha: Rebooting the pension business models’, please see the November edition of IPE magazine

Topics