Schemes keen to diversify to address investment issues - but many trustee boards feel they lack the skills to do so

New research shows that pension scheme managers and trustees are willing to embrace innovative investment strategies to improve diversification and address issues such as the effects of a low interest rate environment.

However, some trustees feel that they lack the training to truly benefit from strategies including multi-asset credit and alternative income.

We surveyed trustees and other scheme staff from defined benefit, trust-based defined contribution and hybrid schemes during April and May 2017. Two thirds (66%) were either professional or member-nominated trustees.

Key findings from the survey were:

• 82% of pension schemes have a formalised long-term investment plan in place, while 61% agree that there is a robust governance framework underpinning each investment strategy for the schemes they work with

• Liability risk is one of the most important factors for schemes according to 63% of trustees – with nearly a third (31%) citing it as the most important risk

• 34% of respondents said that investment decisions are made by the whole trustee board, with support from their investment consultant. A further 32% of trustees use an investment sub-committee to make key choices, again with support from their investment consultant

• 52% of respondents feel able to diversify their investment strategy as they require

• A third (32%) of trustees would use a combination of two or more diversified growth funds, with dynamic/diversified funds being the most popular format

• When asked what alternative income assets trustees would consider to offset current low interest rates, a quarter (25%) said infrastructure equity, followed by infrastructure debt and long-lease property (cited by 23% each)

• For 36%, the main barrier to investing in an alternative income solution is the additional cost not being justified by the returns, while 30% cited lack of trustee understanding of the strategy. A fifth (20%) said a barrier is a shortage of transaction opportunities

• Multi-asset credit (MAC) strategies are predominantly being used within portfolios to improve overall diversification and to generate additional returns, offsetting low interest rates elsewhere (both cited by 43% of respondents)

• A third (33%) consider a lack of understanding of the asset class to be the greatest barrier to investing in MAC, while 44% say that the biggest risk lies with management and reliance on a manager

• Concerns around hiring a fiduciary manager include a lack of transparency around cost (cited by 59% of respondents); a loss of control over the investment decisions (47%) and a lack of confidence in investment professionals (36%)

To read the full report, click here . The research was carried out in association with Aviva Investors, Charles Stanley, Invesco Asset Management and M&G.