Global pensions assess a changing industry

Pension executives from 56 institutions and 14 countries discuss issues ranging from member engagement to transparency and governance, from socially-conscious investing to the impact of regulatory change.

At J.P. Morgan’s 8th annual Multinational Pensions forum in Paris, 65 senior pension executives came together to discuss issues of engagement, transparency, governance and socially-conscious investing (e.g., investing in accordance with environmental, social and governance (ESG) criteria), plus the impact of regulatory change.

As institutions move from traditional Defined Benefit (DB) to Defined Contribution (DC) plans, trustees and board members are striving to increase participation and engagement while still retaining a strong focus on meeting their funding obligations. Plan design, corporate governance and the changing attitudes of millennials also put performance, transparency and ESG in the spotlight. Our polling reflects the views of representatives from 56 institutions, representing 14 countries and nearly US$1.2 trillion in pension assets.

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Split focus

Creating member engagement while efficiently managing your plan

When asked about the most important factor for creating a successful Defined Contribution retirement solution, the majority cited the importance of member engagement, but a combined 52% of respondents focused on other plan components such as the breadth of investment options and choosing an efficient operating model to run the plan.

Factors for creating a successful Defined Contribution retirement solution

42% Ensuring member engagement

29% Breadth of investment options

23% Choosing an efficient operating model to run your plan

6% Minimizing costs associated with the scheme

While trustees and board members wrestle with the challenges of increasing investor/participant engagement and evaluate plan design, J.P. Morgan has solutions to help you manage plan investments. We support a wide array of investment instruments, offering flexibility as you reassess investment criteria or evaluate your plan’s design. And, as you seek to efficiently run your plan, our scalable operating platforms and technology can help you monitor exceptions, evaluate new markets, measure performance, minimize operational risk and adapt to regulatory and market changes.

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Hitting the mark

Setting benchmarks, tracking performance and analyzing results

Trustees are constantly evaluating plan performance in order to manage liabilities and fund for future cash flow requirements. It’s important to set a hierarchy of benchmarks tied to the plan’s mission, use those benchmarks to mitigate specific risks, look at exposure and measure performance.

When asked about the most important driver of benchmark selection, attendees cited:

The most important part of benchmark selection

50% Ease of assessing performance

42% Informing asset selection

8% Greater ease of transition between managers/portfolios

Performance data is critical to understand the long term return and impact of investments against the benchmarks established. Those benchmarks continue to evolve: in fact, more than 80% of the 500 largest companies now produce sustainability reports (vs. less than 25% just five years ago)* showing how they address ESG issues. As more institutions focus on socially responsible investments, including pension plans, understanding the performance of those ESG investments with quantitative data helps to better manage risk and return.

Has your fund implemented ESG investment policies?

NO

YES

0% 10% 20% 30% 40% 50% 60% 70% 80%

If yes, how long have your policies been in place?

Over 5 years

17%3-5 years

38%

Under 3 years

21%

After the 2016 Paris climate accord, the focus on ESG increased sharply and millennials cite ESG and sustainability as important factors in buying behavior and choice of employer.**

Data is the foundation of assessing performance, but turning it into actionable information requires aggregation, analytics and accessibility. To help pension funds, J.P. Morgan is bringing together market risk, compliance and performance measurement tools to deliver integrated analytics, sophisticated visualization tools and the ability to access raw data for direct interrogation. This gives pensions increased transparency into performance, which is crucial to good plan governance.

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To be or not to be

Choosing to clear OTC derivatives, despite an exemption

Pensions are currently exempt from mandatory OTC clearing regulations in Europe through mid-August 2018, with a proposal to extend that exemption until 2020 and some calling for permanent exemption. The exemption is welcome, as pension funds tend to be fully vested and rarely have cash reserves available to meet mandatory variation margin (VM) requirements.

However, the impact of regulation on dealers, clearers and counterparties also affects pension plans. As a result, even pension plans that strongly advocate for ongoing exemption are using clearing selectively, given advantages in:

Regulation has affected execution pricing such that, in some instances, it may be less costly to trade cleared derivatives. In addition, dealers may offer incentives to pension funds that move their bilateral back books to clearing, as that can create a capital advantage for the dealer.

Pension plans that trade cleared derivatives state that it is easier to compare unwind prices in a cleared environment.

Cleared transactions may offer better default protections such as individually segregated accounts and custodial segregation. These can help to ringfence the assets and facilitate the porting of positions to another clearing broker in the event of a default.

Pricing Ease of unwinds Risk management

Pension funds who do choose cleared OTC transactions are looking at ways to reduce the costs around generating cash VM. Many are actively looking at the repo market, trading with non-bank counterparties and focusing on repo clearing. The first cleared repo trade was booked in the fall of 2017 on the LCH as the market continues to adapt.

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J.P. Morgan’s 8th Annual Multinational Pensions Forum took place in Paris in October 2017.

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* http://www.pionline.com/article/20170918/PRINT/170919886/esg-factors-a-welcome-addition-to-portfolio-management** https://www.capgemini.com/2017/06/millennials-demand-social-impact-centric-products-services-and-companies