Public Pension Plans Looking To Alts To Meet Goals

Mar 31 2014 | 11:27am ET

A full 71% of public pension plans are looking to alternative assets to meet their goals in a rising interest rate environment, according to new study sponsored by Prudential.

The survey on de-risking defined benefit pension plans found a significant shift in asset allocation, particularly among plans that are underfunded.

“While we’ve seen a closed plan switch to fixed income, open plans are very much looking to alternatives as results for this survey clearly indicate,” said Dan Tremblay, director of institutional fixed-income solutions at Pyramis in a statement. “Schemes are taking the impact of increased longevity on their liabilities more seriously and are considering buy-out solutions and improving returns through a switch to alternatives.”

With people living longer and longevity risk a defining factor in decision-making, more than 30% of North American closed defined benefit pension schemes said they are considering or are very likely to carry out a pension risk transfer transaction this year, according to the survey. With more than $2 trillion pension plan assets at stake, this could be a major opportunity for third-party insurers, with schemes considering a range of buy-out solutions.

UK pension scheme sponsors have been proponents of plan de-risking for several years but the U.S. industry has historically been more cautious. The survey found that attitudes are changing and that risk transfer has become more of a priority, as illustrated by the rising number of schemes considering a buy-out.

“Plan sponsors are starting to realize that de-risking can be less expensive than keeping the liabilities on their balance sheets and transferring pension risk allows companies to focus on the day to day running of the business,” said Glenn O’Brien of Prudential Financial in a statement. “[W]e’re now seeing a transition to real assets for these private plans, whereas public plans are anticipating a reallocation to alternatives.”

The survey, based on information from more than 60 North American pension plan managers and pensions sponsor representatives, was carried out by Clear Path Analysis.


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