Pension funds in Asia Pacific are building allocations to alternative assets and intend to make changes to their governance models as a result, finds new research by financial services group State Street Corporation.

The search for sustainable returns is driving pensions deeper into alternative investments, with 57% of Asia-Pacific respondents planning to increase their exposure to private equity in the next three years and 54% intending to allocate more to infrastructure. 

Moreover, nearly eight in 10 of respondents in Singapore and Hong Kong (78%) aim to increase their exposure to single-manager hedge funds.

State Street’s findings are supported by activity among large, influential Asian pension funds. Recent examples of asset owners moving to increase their alternatives exposure include China’s National Social Security Fund (see story in today's newsletter), Malaysia’s Employees Provident Fund and Taiwan’s Bureau of Labor Funds.

The increased allocation to alternative assets exposes funds to new types of investment and liquidity risks, notes the State Street report. In addition to requiring specialist investment knowledge, the illiquid characteristics of alternatives impact portfolio liquidity by tying up capital over the long term.

The research says that when it comes to pensions’ understanding of the risks facing the retirement funds they are overseeing, just 27% rate their abilities as very good or excellent. Only around a fifth (22%) say their institutions governing fiduciaries are very strong at being able to think beyond short-term issues to address longer-term, strategic factors affecting the portfolio.

Around a third of pension funds in Asia Pacific (31%) say they have real transparency on risks associated with alternatives, and only 6% say they can manage their liquidity risks most effectively.

To help address some of these issues, 96% of Asia-Pacific pension fund professionals said the funds they work for were planning to make one or more major changes to their governance models.

Over the next year, 56% expect the balance of responsibilities between board and management will be adjusted, and anticipate the process for recruiting new board members to be changed. Half of them are also planning to revise incentive models. 

Hong Kong and Singapore pension funds, in particular, see increasing the autonomy of the investment function as a way to strengthen governance support, with some 60% expecting this change in the coming year compared to 37% globally.

Meanwhile, pension funds in markets such as Australia (96%) and Japan (73%) have expressed interest in environmental, social, governance (ESG) investing over the next three years. Most of them are looking to hire managers with ESG capabilities.

Asia-Pacific pensions are also seeking out efficiencies where they can, with 59% admitting they are under pressure to cut costs. More than half of respondents in the region (55%) are considering pooling assets in the next three years, as they agree that the benefits of consolidation include reduced costs and improved operational effectiveness.

*Pensions with Purpose - Meeting the Retirement Challenge surveyed 400 pension fund professionals globally, a quarter of which are in Asia Pacific.