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Soaring Markets Aren’t the Only Reason Pensions Grew in 2020

Better governance is also driving stronger performance, according to Willis Towers Watson — and poorly governed funds may not be able to keep up.

Despite challenges related to the Covid-19 pandemic, the 300 largest pension funds by assets under management grew by 11.5 percent over the course of 2020, according to a report from the Thinking Ahead Institute, an offshoot of global advisory firm Willis Towers Watson.

Pension funds’ 2020 growth trumped that of 2019, when they advanced by about 8 percent. 

“Part of that is, yes, strong equity market returns, but there are a lot of portfolio construction decisions,” Marisa Hall, co-head of the Thinking Ahead Institute, told Institutional Investor. “What we believe is that, for the funds that did better, their performance is bound to having stronger governance models and stronger cultural attributes.” 

This includes pension boards’ increased focus on improving governance models to achieve goals like sustainability, diversity, and net-zero mandates, the researchers argued. But not every fund in the top 300 is set up to achieve those mandates.

“It’s really important, as funds take on sustainability targets and move toward net zero, that their governance model is poised to be able to meet those objectives,” Hall said. “We’re talking about funds that have adopted a total portfolio approach where they move away from just having a specific asset allocation benchmark, but actually consider the portfolio as a total body of assets and their objectives. We find those funds to be better positioned to be able to reach target returns.”

This total portfolio approach allows investors to be more agile and dynamic, which, in turn, allows them to meet their sustainability and net-zero goals, Hall said. 

“You can actually look at your private markets allocation and use that as the asset that you will use to meet your sustainability goals, for instance,” Hall said. “It’s about thinking about the portfolio more holistically.” 

However, while some of the funds in the top 300 have adopted this kind of total portfolio approach, not all of them have, Hall said. The Thinking Ahead researchers predicted that funds with strong and robust governance models will continue to perform strongly, while funds that lack this type of infrastructure will begin to lag in the coming years. 

“Just because you’re a larger fund doesn’t mean you have positioned yourself to be able to meet the challenges of sustainability and net zero,” Hall said. “Without thinking about governance, many of these pension funds will fall behind in the future; they will be unable to meet some of the more complex challenges that we’re having in the world today.”

Out of the 20 largest funds, seven said it was important to practice sustainable and responsible investing in order to “ensure the long-term value of funds’ investments,” the report said. Seven funds also emphasized the importance of portfolio diversification. 

Within the top 300 pension funds, the 20 biggest funds accounted for 41.8 percent of the total assets under management, up from 40.7 percent in 2019. Nearly half of the 300 largest funds were in the public and sovereign sectors. In fact, the largest pension fund in the world is the Government Pension Investment Fund of Japan (with $1.7 trillion in assets), followed by the Government Pension Fund of Norway (with $1.3 trillion under management).

The report also attributed the year-over-year growth of pension funds to a strong equities market. According to the report, the top 20 funds invested around 41.7 percent of their assets in equities, more than they allocated to any other asset class.

Tom Harvey, a director of SEI’s institutional group advisory team who largely works with corporate pensions and hospitals, argued that the growth of pension funds isn’t specific to 2020: It’s a ten-year story. 

“Most of this return is just a function of the markets,” he told II. When asked whether governance of pension funds played a role in the growth, he said, “Even if there was a differentiator, it’d be hard to tell in a year.” 

Harvey agreed with researchers on one thing: Pension plans’ growth is largely dependent on their long-termism. 

“Pensions stick to their strategies through thick and thin,” he said. “Pensions are successful because they are very long-term investors. They view their liabilities as 20 to 30 years out, so they stay invested during market downturns and cycles.” 

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