GSAM Finds Reasons for Optimism for DB Pension Funds in 2024

Goldman Sachs Asset Management (GSAM) has found Europe’s defined benefit pension funds have emerged from the economic challenges of the past two years with improved funding levels.

The firm has published its European Pension Fund Survey, which asked 126 senior managers and executives at defined benefit pension schemes about their work.

Nearly two-thirds of the respondents said their funds were close to 100% funded or in surplus and over 80% said their pension plans were on track to meet 2023 asset and liability management return targets.

The survey found funding ratios had been on an upward trajectory in Europe in 2022 and 2023, primarily due to high-interest rates, which drove down the value of funds’ long-term liabilities.

Fadi Abuali, CEO of GSAM International said:  “Many [DB pension funds] are better funded than they have been for years and optimistic about the investment climate, yet the economic outlook is uncertain, with higher-for-longer rates, divergent growth paths around the world and elevated geopolitical risk.”

The survey assessed DB pension funds’ market outlook and allocation plans, the role of sustainability in their investment strategies and their use of outsourced asset management services.

Allocation Priorities

Investment-grade debt, private credit and developed market equity were expected to have the highest risk-adjusted return in the year ahead, according to survey respondents. Nearly half of respondents (48%) predicted investment grade debt would perform well, compared to 45% expecting private credit to have high returns and 34% anticipating developed market equity to generate the best returns.

To take advantage of these opportunities, nine in 10 respondents (94%) plan to increase or maintain their allocations to these asset classes.

In contrast, only 13% expected real estate to have a high risk-adjusted return, and real estate investment is first in line for decreased allocations.

The report compared the responses of fully or over-funded pension funds with their underfunded peers. The comparison showed that the best-funded pension schemes are allocating more to cash and less to developed-market equities.

Marco Willner, head of dynamic asset allocation, multi-asset solutions, said:  “Investor optimism is gradually returning, and this is linked to a shift in the dominant market narrative since the Fed’s pivot in December. The focus is now on the themes of macro resilience, disinflation, a soft landing and reduced recession risks.”

Outsourcing Asset Management

The trend of outsourcing investment management is gaining momentum in Europe amid increasingly complex compliance requirements, rising costs and uncertain markets.

More than seven in 10 respondents (72%) said they delegate the running of some or all of their investment portfolio to an external manager, highlighting the importance of this service to pension funds.

Adding differentiated expertise, methodologies, and capabilities to their portfolio was the most important consideration in the decision to outsource their investment portfolio for 31% of respondents, compared to 26% who prioritized improving the investment expertise running the portfolio.

In contrast, just 2% selected investment analytics and 4% said aligning with new regulations or other external requirements.

The survey also found many respondents sought an external manager with a commitment to ESG investing and with ESG and stewardship policies in place. Over 40% of respondents said they rely on external asset managers to develop their sustainable-investing policy.

However, among the larger funds — those with more than $5 billion in assets under management — two-thirds of respondents rely on internal resources such as an in-house ESG specialist.