Asian pensions may be less worried than their Western peers about the imminent US debt-payment deadline, but they are mulling whether and how to reposition their portfolios should the American government default.
Roger Urwin, global head of investment content at Towers Watson, says he is receiving a rising number of inquiries from retirement funds in the region about what to do if politicians in Washington fail to raise the government’s borrowing limits by the October 17 deadline (this coming Thursday).
“It’s an increasingly common situation to have to address political and economic risks. These are unquantifiable risks. Pension funds inevitably struggle to translate them into their underlying portfolios,” London-based Urwin told AsianInvestor on a recent trip to Hong Kong.
Ultimately, advising pensions – which have long-term mandates – on short-term positions, is no easy task, he notes. “We are asked for advice and if there are any tactical moves [the pensions] can make. It's tricky."
Investment consultancy Towers Watson does not expect the US to default and, as such, is advising clients to maintain their long-term outlooks. “The likelihood of anything happening has remained low, so any impact [on pension portfolios] will likely be insubstantial,” Urwin says. “That means they should not change their portfolios.”
This outlook is shared by other private banks and fund managers, some of whom recommend an overweight position in US equities.
Urwin says US pension funds are more concerned about the debacle in Washington than their Asian or European counterparts, although the world is unquestionably watching the US as the deadline looms.
With regard to Asia, Urwin says Towers Watson is focusing on trying to tackle what he calls a “catch 22” for the region’s pension industry. Many Asian contributors do not feel confident in their employers’ ability to invest their money, he argues, while employers in turn are nervous about having too much responsibility for their members’ choices.
Unlike their US counterparts, pension funds in Asia do not have provisions in place, such as ‘safe harbour’ laws, to protect employers from potential liability in their pension funds, notes Urwin.
“Over time, other countries have been able to develop better member engagement [for] pensions,” he adds. “In the US and UK, employers and their members are [pretty much] on the same wavelength with respect to their pensions.” This will happen in Asia, but not for years.
Another area Towers Watson aims to provide more advice on in the region is asset-liability management (ALM), a “critical feature for defined benefit plans”, Urwin says.
Insurance firms in Asia, both home-grown and foreign, are focusing their efforts on matching assets to liability now than they have in the past – Germany’s Allianz is one such firm that is focused on building out its ALM capabilities in Asia.
Yet while development of ALM capabilites is picking up among insurers in Asia, that's not necessarily the case for pensions, Urwin says, but he expects this to change gradually. And as it does, Asian pensions’ allocations and risk appetite are likely to alter, he adds.
Pension funds in the region – which tend to have have 40% allocated to equities, 40% to bonds and 20% to alternatives – will rebalance the latter two categories, with Towers Watson forecasting an uptick in real estate investment.
“Some of the bond exposure will lighten a bit while the alternatives bucket will increase,” Urwin says. “That’s more of an observation of where the market is putting its money rather than what will necessarily make money.”
While Asian pensions and insurers have been investing in offshore commercial property – notably in the US and Europe – for some time, they are eyeing residential properties as well, according to Brookfield Financial.