Losses and mandated withdrawals at some Asian retirement schemes have sparked concerns about the quality of governance and investment management at some pension funds. Advocates of outsourced investment solutions say these vulnerabilities underscore why more funds should consider externalising investment operations.

Globally, most pension funds incurred losses during the first three months of the year as equity markets registered the worst quarterly performance on record. Japan's Government Pension Investment Fund (GPIF), for instance, recorded a ¥18 trillion ($168 billion) loss during the first quarter of the year, a record quarterly loss, based on an estimate by Nomura Securities. According to Mercer’s data, the world's largest pension fund had a 42.8% exposure to equities as at the end of 2019.

While most asset prices have since largely recovered, the fact that many pension fund portfolios proved so vulnerable during a crisis has sparked concerns about weaknesses in their investment approaches and risk management. 

“The pandemic has triggered a focus on fund governance as decision making [at these funds] is being put to the test,” Janet Li, Mercer’s wealth business leader for Asia, told AsianInvestor. “The earlier market volatility created some asset losses in portfolios. A well-thought through asset allocation would mitigate panic.”

Janet Li
Janet Li, Mercer

She argued that pension funds need to possess a clearly stated targeted asset allocation range, which sets out how much they aim to have in different asset classes, and a rebalancing mechanism that defines how the fund shifts its overall allocations. Investors that lack such defined processes risk seeing their investment teams start to deviate from stated risk and return objectives.

The Board of Trustees (BoT) or investment committees that oversee a pension fund’s investment processes can sometimes fill the “gap” and set the overall strategy of the fund during market turbulence. However, Li said that this is not a perfect solution.

People have a behavioural tendency to reduce risk exposure in times of adversity, resulting in the fund selling assets as prices slide – effectively the opposite of the classic ‘buy low, sell high’ strategy. Having a targeted asset allocation range and rebalancing mechanism can mitigate this tendency.

Li noted that a well-diversified portfolio would help mitigate losses and avoid emotion-driven decision-making during a crisis. However, she stressed that any “diversification needs to be analysed deeper,” including scrutinising “the correlation of alpha sources”.

The latest crisis has underscored the dangers of too little asset diversification. Pension funds with higher allocations to equities are likely to have been particularly at risk of negative returns.

Hong Kong’s Occupational Retirement Schemes Ordinary (Orso) and Mandatory Provident Fund (MPF) offer one example. The retirement schemes have a combined 65% exposure to equities, the highest among funds in India, Indonesia, South Korea, Malaysia, Taiwan and Thailand. 


Investment consultants and some fund managers argue that smaller pension funds can improve investment allocation and risk management by outsourcing investment services to an external manager. These companies oversee part of or all of the investment portfolio for an annual fee.

Mercer is a strong advocate, being a global leader in outsourced chief investment officer (OCIO) services as well as an investment consultant. Along with rival Willis Towers Watson, it is looking to offer these services in Asia after seeing more pension funds employ them in Europe and the US.

OCIO providers argue that pension funds that choose to outsource get access to a greater variety of assets for less cost, as well as more sophisticated risk management. And Li said recent volatility and the limitations of some pension funds underlines the benefits of an OCIO approach.

“These scenarios have prompted more discussions around delegating the investment management and overall portfolio discretion to an OCIO to take accountability and responsibility on the portfolio, given the OCIO would usually be staffed with full investment expertise and resources,” said Li.

She did not say whether Mercer is engaged in such discussions with Asian pension funds.

Subsequent to her interview with AsianInvestor, Li said in a June 11 press release that Mercer had seen “an increased appreciation of the importance of good governance among institutional investors in Asia, but progress in the region towards international standards has been mixed”.

Besides discipline, policies must also be agile enough to respond to threats and pursue opportunities. “Major system shocks such as the current crisis typically lead to dislocations, creating potential opportunities that investors will miss unless they have the agility to opportunistically shift into attractively repriced market segments,” Mercer said in a report 'Navigating a Pandemic-driven Market Crisis', released on the same day.

An earlier report by Mercer on asset allocation on June 4 revealed that most Asian pension funds have sought to improve alpha gains by investing more in alternative assets and foreign assets. Overseas asset allocations for funds in Asia, excluding Japan, have also generally risen, for equity from 33.7% in 2013 to 47.8% last year, and 8.7% to 9.4% for fixed income over the same period. 

But these trends are not universal. Retirement schemes in Hong Kong and India have not generally opted to invest in alternative assets.


The Covid-19 pandemic has also thrown up another challenge for pension funds in the form of government-mandated early withdrawal schemes.

Australian superannuation funds, for instance, now need to factor in sovereign risk following the implementation of such schemes, said David Elia, chief executive of super fund HostPlus, in an interview with a local TV network.

Australia is not alone. Many governments, including those in the Philippines and Malaysia, have allowed early access to retirement funds to help their citizens financially as unemployment rises. Australian superannuation funds had paid A$12.2 billion ($8.5 billion) between the launch of the early release scheme on April 20 and May 24, based on the latest available data from the Australian Prudential Regulation Authority. 

Hostplus’s Elia said the government’s emergency measure allowing members facing financial strife to withdraw from their super will cut returns for members. It’s a point underscored by Li. “The early withdrawal itself is a drawdown to the retirement portfolio which sacrifices the compound interest effect of long-term investing,” said Li.

Additionally, while such measures may be necessary to address urgent needs, it could force pension funds to sell assets during a period in which their values had been dropping. That would damage overall investment returns, warned Li.