Tài liệu Pension Fund Indicators 2012 A long-term perspective on pension fund investment docx

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Pension Fund Indicators 2012
A long-term perspective
on pension fund investment.
Pension Fund Indicators 2012
Production editor and enquiries
Ben Lloyd, telephone 020 7901 6263
Media enquiries
Telephone 020 7568 9982
Contributors
Agnes Bartha (Performance measurement and data)
Ben Lloyd (UK pension assets, Asset allocation and Alternative sources of return)
Bernard Hunter (Bonds)
Bronte Somes (Infrastructure and Private Equity)
Dan Edelman (Hedge Funds)
David Roberts (Real Estate)
Ian Barnes (Current thinking in UK pensions)
Ian Howard (Performance measurement and data)
James Collyer (Equities)
Kevin Barker (Equities)
Liz Troni (Real Estate)
Mark Deans (Risk measurement and Derivatives)
Matt Bance (Global tactical asset allocation and Currency)
Neil Olympio (Asset allocation in the presence of liabilities)
Paul Moy (Infrastructure and Private Equity)
Stephan Schnuerer (Infrastructure and Private Equity)
Uta Fehm (Bonds)
© UBS 2012. The key symbol and UBS are among the registered and unregistered trademarks of UBS.
All rights reserved. July 2012.
Crown copyright material (sourced as “National Statistics”) is reproduced under the terms of the Open Government Licence
from HMSO/National Archives.

While every care has been taken in the compilation of the data in this book, neither UBS Global Asset Management (UK) Ltd
nor any of the other data sources quoted will be liable for any consequences arising from the inclusion of inaccurate data.
Some historic data may no longer be available from the original sources but is reproduced from earlier editions of
Pension Fund Indicators.
1
Pension Fund Indicators 2012
Foreword
Our aim with Pension Fund Indicators is to deliver to our readership an objective and educational source of investment data
and practical explanations, covering the range of investments available to pension funds and the various techniques for
combining them.
In this Olympic and Diamond Jubilee year, it is with great pleasure that we celebrate a milestone of our own: the latest
edition of Pension Fund Indicators, now in its 40th year. The first edition, released in 1973, focussed solely on UK equity
and gilt markets. Today we cover the broad spectrum of asset classes utilised by occupational self-administered pension
schemes which, we estimate have total assets in excess of GBP 1 trillion (see figure A.5).
Whilst somewhat clichéd, it is true to say that change is the only constant. Over the years, the publication has sought to
draw in new topics: 1978 saw overseas investment and property merit their own chapters for the first time. At one point,
alternatives only commanded one page and it wasn’t until 2000 that this chapter was significantly expanded. Today,
alternatives are covered extensively in Chapter 6.
In this edition, we have maintained our topical chapter, ‘Current thinking in UK pensions’ (Chapter 1). This looks at some
of the recent trends and news in the UK pensions industry and sets them in their longer term context.
Turning to global markets, 2011 saw a return of some of the volatility experienced during the extreme financial events of
2008 and 2009. This came after the somewhat relative calm of 2010. The key driver of equity markets was macro news
flow and the ensuing gyration between ‘risk on’ and ‘risk off’ behaviour. The eurozone sovereign debt crisis dominated
headlines while investors shunned ‘risk’ assets, such as equities, in favour of perceived safe havens. In this extremely volatile
environment, world equity markets returned -6.2% (as measured by the MSCI AC World Index in Sterling terms) despite a
strong finish to the year.
Recession, coupled with the sovereign debt crisis, means that market uncertainty – and thus volatility – looks set to linger.
This volatility is borne out in the figures showing the aggregate funding position of corporate pension schemes in the UK.
Based on the PPF-7800 Index, the aggregate position went from a surplus of GBP 21.7 billion to end the year with a deficit
of GBP 255.2 billion during 2011.

2012 and beyond brings with it many challenges for pension schemes. There is no doubt that many schemes will continue
to look at diversification, as well as seeking out new sources of alpha and improved risk management.
2012 also heralds the ‘go-live’ of auto-enrolment. Set against the backdrop of just 19% of Defined Benefit schemes in the
UK remaining open to new members in 2011, compared from 23% in 2009, alternative arrangements for individuals saving
for retirement are even more pressing.
During these challenging times, we hope that this publication provides you with some informative facts and valuable
insights, which you are able to draw upon when thinking about your pension fund investment strategy.
Ian Barnes
Head of UK & Ireland
UBS Global Asset Management
July 2012
2
Contents
1 Current thinking in UK pensions 5
2 Asset allocation in the presence of liabilities 11
The focus on liabilities
2011 - a challenging year for maintaining funding ratios
The implications for sponsors and trustees
A failure of asset allocation?
A failure of risk management
A new metric
Structuring investment policy
Asset liability investment solutions
Liability hedging strategies
Return generating strategies
Dynamic risk management
Reducing/eliminating longevity risk
Implementation considerations
When to hedge liabilities?
Return generation – the role of derivatives

Looking ahead
3 Equities 21
Introduction
Equity characteristics
What is an equity?
Uncertain long-term returns
Volatility
Diversification
Sensitivity to interest rates and inflation
Equity valuation
Equity markets
The global equity market
Emerging market equities
Equity management
Approaches
Active management
Style
Value
Growth
Momentum
Small company equity
Unconstrained equity investment
Short extension or 130/30 funds
Active quantitative techniques
Passive equity
Corporate governance and socially responsible investment
How suitable are equities for pension funds?
4 Bonds 41
What is a bond?
Who issues bonds?

Credit risk and the growing importance of non-government bonds
The global bond market
Some important bond terminology
Pension fund allocation to bonds
Emerging market bonds
Pension Fund Indicators 2012
3
5 Real Estate 53
What is real estate?
Gaining exposure to real estate
Real estate derivatives
Key benefits and challenges of investing in real estate
Global real estate investment
The UK and European real estate markets
Market performance
Differences in market practices
Commercial real estate sectors
The US real estate market
Market performance
Commercial real estate sectors
The Asia Pacific real estate market
Market performance
Within-region diversification benefits
Growth of Asia Pacific real estate markets
6 Alternative sources of return 67
What are suitable alternative investments?
Hedge funds
Hedge fund strategies
Performance
Private equity

Private equity as an asset class
Private equity investment characteristics
Increasing investor interest
The private equity industry in 2011
The private equity market in 2012
Infrastructure
A defensive component in portfolios can enhance long-term overall returns
Defining infrastructure assets
Infrastructure as an asset class
How does infrastructure compare with other asset classes?
Risks
Investing in infrastructure
Key attributes of best-in-class infrastructure managers
Key issues in 2012 and beyond
Global tactical asset allocation
Currency
How does currency affect returns?
Equilibrium risk and return
Currency effects in non-equilibrium conditions
The case for dynamic management
Separation of currency investment decision
Gold
Commodities
Art
4
Appendices
A - UK pension assets 92
B - Asset allocation - the historical perspective 95
C - Risk measurement 106
D - Derivatives 112

E - Performance measurement 117
F - List of tables and graphs 121
5
1
Current
thinking in
UK pensions
6
Over the past 39 years that we have been publishing Pension
Fund Indicators, the various authors of this chapter have
commented on the many trends and challenges that the
UK pension market has faced. Sometimes the tone has
been upbeat and optimistic, other times more sombre and
introspective. Unfortunately, the subject of this chapter
for this edition is possibly the most challenging that UK
pension schemes have ever had to face, as it deals with the
breakdown of a fundamental relationship between asset
returns and inflation. Whilst this topic may be dry (unlike the
start of summer 2012), it is no less important than the other
topics that have been featured in previous editions.
Preaching to the converted?
Pension funds the world over have become converts of
the asset-liability study, the process by which the expected
returns from the mix of assets held is linked to the expected
growth of a pension scheme’s liabilities. Key to these studies
is the data input on the expected returns of different asset
classes. To be consistent with certain truisms about capital
markets (such as “over the long-term the return on capital
must exceed the cost of capital”), these expected returns
are usually built up from an assumed risk-free rate of return

(or cash) plus a risk premium which varies from asset class to
asset class. So, the higher the perceived risk of the asset, the
higher the size of the risk premium to act as compensation.
Looking at a real world example, equities are deemed more
risky than bonds, and so the equity risk premium is higher
than the bond risk premium.
For pension funds, managing interest rate and inflation
exposures remains a core objective. Therefore, the goal of the
asset-liability study is to find a mix of asset classes where the
combined risk premia from these assets will exceed inflation
by a certain margin in order to keep the cost of meeting those
liabilities relatively manageable. The cash coming in must
match the cash going out. A typical pension fund will aim to
beat inflation by about 3%.
Under normal market conditions, the risk-free rate is
expected to exceed the prevailing rate of inflation by a
modest amount. Usually the size of the risk premium
required to achieve inflation plus 3% will be somewhere
between the risk premium for equities and the risk premium
for bonds, hence most pension funds have a mix of these
two basic asset classes.
The importance of these two main asset classes for pension
funds over a 49 year period is shown in Figure 1.1. It is
interesting to see how the asset allocation of the average
pension fund has changed over this time period. Exposure to
bonds and equities still dominate, yet there are a number of
interesting themes:

• Reduction in exposure to UK equities, with a larger
exposure to global equities

• Fixed income exposure hit a low in the 90’s and whilst
bigger now, a significant portion is in Index-Linked Gilts
• The exposure to alternatives, non-existent in the 1960’s,
70’s, 80’s and most of the 90’s has seen a general
increase from 2005 on
Despite these changing asset mixes, the overall inflation-
beating objective still remains.
So far, so good. Well, much like the unpredictable nature
of the weather, when markets do not behave like they
are meant to, what happens then? Surely the return
differential between the cash rate and inflation is relatively
stable? Actually, no, and this is the root of the significant
challenge facing UK pension schemes in 2012 and for the
foreseeable future.
The real rate challenge
One of the biggest investment problems that pension funds
face in the current climate is the magnitude of negative real
short rates. In other words, the short-term interest rate is
too low and is actually below the prevailing rate
of inflation.
By drawing in data from across our investment teams,
our analysis indicates that the risk premium for equities
should be about 3.75%, and for government bonds about
1%. Whilst the current risk-free rate yields only 0.5%, an
expectation for the total return to equities is about 4.25%.
Clearly then, it is difficult to exceed an inflation rate of
around 3% (at the time of writing) by any significant margin,
and certainly a return of inflation plus 3% is very difficult
to achieve.
A government can shrink its fiscal deficit by allowing

inflation to erode the debt away. Although not an explicit
policy objective of the Bank of England’s Monetary Policy
Committee, the inflation and interest data over the last few
years would appear to suggest that such a plan is being
followed. This means that it is possible that negative real
rates could persist for some time to come. Indeed the index-
linked bond market is forecasting that real short rates will
remain negative for the next seven years. To put this into
perspective, in ‘normal’ circumstances we would expect the
short-term interest rate to be some 2.4% higher than the
inflation rate.
What about timing issues?
Of course it is possible that a better outcome than this
expected return might be achieved in equity markets. This
could come to pass if equities start from an undervalued
position. Regrettably, by our measures at least, global
equities are not particularly cheap at the current time (with
the exception of European equities, and we all know why
this is the case).
1. Current thinking in UK pensions
Pension Fund Indicators 2012
7
Furthermore, there would appear to be many reasons why
UK equity prices may suffer downward pressure in the
coming years:
• Solvency II in the insurance world is likely to make
insurance companies sellers of equities
• Defined Benefit pension schemes will continue to close
and mature, with an associated shift out of equities into
matching assets

• The Retail Distribution Review (RDR) in the UK and other
similar reviews elsewhere in Europe will ban the payment
of commission to financial advisors. Retail investors
who want advice will now have to pay up-front fees for
this advice, which is likely to shrink the population of
investors taking advice. In the absence of advice, it has
been shown that people on average tend to be overly
conservative and so we expect greater retail flows into
money-market and guaranteed products rather than
equity-oriented, growth products
• Finally, given lack-lustre equity returns over the past
decade or so in many developed markets, often referred
to as the lost decade for equities, you may also see a
whole generation of retail investors put off ever buying
equities again.
In our view these pressures are a good reason not to
count on unusually high equity returns in the coming
years – however they are not reasons to despair! As various
countries around the world come out of recession over
the next few years, this is usually the environment where
equities do best. These two factors are likely to balance
each, leading us to predict equity returns within normal
bands between now and the end of the decade.
Figure 1.1 Asset allocation – average pension fund, 1962-2011
Source: National Statistics (until 1995), WM (1996 onwards). As at December 2011
1962 1976 1990 20 041969 1983 1997 2011
0%
20%
40%
60%

80%
100%
UK equities Overseas equities UK fixed income Overseas fixed income Cash Real estate Index-linked gilts Alternatives
8
1. Current thinking in UK pensions
Figure 1.2 Asset allocation – average pension fund, 1962-2011 (%) So what are pension schemes doing?
As has been the case for some years, a number of existing
themes for pension funds continue to play out. As we
spoke about earlier in this chapter, the move out of
equities and in particular UK equities in favour of fixed
income assets continues. While pension funds’ exposure
to overseas equities is higher than that to UK equities,
exposure to this asset class has also fallen, from a peak of
32% in 2005/06, to 25%, a level last seen in 2001.
The focus of schemes on their liabilities remains key. There
is also continued interest in absolute/total return strategies
as well as alternative asset classes. As can be seen in
Figure 1.2, pension funds exposure to alternatives has
been increasing steadily. Indeed, some of the alternative
asset classes that pension funds have been considering
would also appear to have many of the same attributes
as equities and bonds. Private equity, for example, is
also a claim on future cash flows derived from corporate
profits. The difference is that, unlike traditional equity
investments, these companies are not publicly listed and
so the investment is relatively illiquid and there should be
a premium paid to the investor for this liquidity.
In a low interest rate environment, the need for
income is key
In the final section of this chapter, we cover the increasing

demand for income from DB and DC pension assets. As DB
schemes increasingly mature, and as annuity rates remain
challenging for those retiring who derive the bulk of their
pension assets from a DC scheme, more and more people
are looking at drawdown rather than annuitisation. As a
consequence, the demand for income generation from
pension schemes is increasing.
Most schemes address this income need (at least
initially) by stripping the dividend flow from their equity
investments. This is all well and good when your expected
returns are above your inflation plus target. Now that
returns are severely challenged, stripping such income
out simply lowers the total return on these equities to
an unacceptably low level. If you are not reinvesting
dividends, you are not earning a return on those dividends
and so your compounded return drops. Figure 1.3 shows
the impact on returns of the FTSE ALL-Share with income
reinvested and not.
Source: National Statistics (until 1995), WM (1996 onwards)
UK Eq= UK Equities
OS Eq= Overseas Equities
UK FI= UK Fixed Income
ILG= Index-linked Gilts
OS FI= Overseas Fixed Income
Cash= Cash
RE = Real Estate
Alt= Alternatives
End UK Eq OS Eq UK FI ILG OS FI Cash RE Alt
1962
1963

1964
47
45
46
51
51
50
2
2
2
2
2
1965
1966
1967
1968
47
43
47
54
1
1
1
48
49
45
36
3
2
2

3
2
5
5
6
1969
1970
1971
1972
52
50
56
57
1
2
2
4
36
34
31
25
3
4
3
5
8
10
8
9
1973

1974
1975
1976
48
34
45
44
4
4
5
5
26
27
26
28
8
16
9
7
14
19
15
16
1977
1978
1979
1980
45
45
45

46
4
5
5
8
28
28
26
25
6
6
7
4
17
16
17
17
1981
1982
1983
1984
45
44
45
49
10
12
15
14
21

22
20
17
2
3
3
3 1
4
4
4
4
18
15
13
12
1985
1986
1987
1988
51
53
54
52
14
16
13
16
17
14
14

12
3
3
3
3
1
1
1
1
3
4
5
6
11
9
10
10
1989
1990
1991
1992
52
52
55
56
20
18
20
21
8

8
7
6
3
3
3
3
2
2
3
3
6
7
4
4
9
10
8
7
1993
1994
1995
1996
57
54
55
53
24
23
22

22
4
5
6
6
3
4
5
5
3
4
3
3
4
4
4
5
5
6
5
5 1
1997
1998
1999
2000
53
51
51
48
20

20
24
23
7
9
9
10
5
6
4
6
3
4
4
4
6
4
3
3
5
5
4
5
1
1
1
1
2001
2002
2003

2004
46
39
39
37
25
25
28
29
10
13
12
13
7
9
9
9
3
4
3
3
2
2
2
1
6
7
6
7
1

1
1
1
2005
2006
2007
2008
33
32
26
21
32
32
31
28
13
12
15
17
9
9
11
13
2
3
4
4
2
2
2

3
7
7
7
7
2
3
4
7
2009
2010
2011
23
21
18
28
29
25
17
16
18
13
14
17
4
4
4
2
2
1

6
6
7
7
8
9
Figure 1.3 Value of GBP 100 invested in FTSE All-Share
Rather than these simple and naïve income mechanisms,
what is required is a more fundamental investment
programme engineered to generate income in a more
appropriate way. The market has few such products at the
moment and we encourage the industry to concentrate on
developing solutions for this problem, else a bad situation will
be made worse.
As the challenging market conditions we face at the time
of writing look set to continue, more will be written about
the cost and most appropriate way of providing pension
provision for all in society. As we mentioned in the Foreword
and as the British weather has shown, change is the only
constant and the need to be flexible and alert, is key.
Pension Fund Indicators 2012
9
Source: Lipper
Data based in Sterling terms to 31 May 2012
CR= capital return with income paid out
TR= Total return with income reinvested
GBP
1985 200 519951990 20102000
0
200

400
600
800
1,000
1,200
FTSE All-Share CR FTSE All-Share TR
21895
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