Following is a translated digest of “Survey of Pension Product Demand and Supply 2022”. The original appeared in a Japanese magazine for institutional investors, AL-IN, vol.64, June 2022.
Since 2016, AL-IN has polled Japanese corporate pension funds about product demand and supply. The previous survey taken in June 2020, found pension portfolios unshaken by short-term market fluctuations. Two years later, foreign central banks are moving rapidly to raise interest rates against unprecedented inflation and markets now worry about an economic slowdown. Between May 9 and June 3, 2002, AL-IN surveyed Japanese corporate pension funds about their preparations for this difficult phase. Data was collected from 129 respondents.
RISK-RETURN LEVEL
Risk/return levels among corporate pension funds remain generally similar to those reported in the 2020 survey (see https://investmentjapan.jp/research/2207/). The volume zone for assumed interest rates is 2.1% – 2.5% and the volume zone for target interest rates is 0.5% above the assumed rate of 2.6% - 3.0%. However, the volume zone for assumed risk at 4.6% - 6.0% is slightly higher. Corporate pension funds appear to be more acceptable of risk in 2022, reflecting the volatile post-COVID market environment.
Actual returns in fiscal 2021 were positive for most corporate pensions (114 valid responses), in contrast to the previous survey where more than 60% cited negative returns for FY2019 (ending March 31, 2020) due to the COVID-19 pandemic. Although 4th quarter performance was generally poor, many funds saw positive returns throughout the year, mainly in the 2%-3% range. The average actual return was 3.34%, with a high of 11.7%. In addition, nearly 60% of the funds surveyed appear to have achieved their target rate of return.
ADOPTED PRODUCTS BY ASSET CLASS
Pension funds appear to be embracing more non-traditional assets. Compared to the 2020 survey, policy asset mixes (PAM) show a 6.5 point increase in alternative assets to 69.0% (74.4% in actual investment portfolios). Multi-asset strategy as an independent allocation increased by 3.7 points to 31.0% (47.3% in investment portfolios, increased from 34.4% in the previous survey). < see CHART 1 below >
By allocation ratio, domestic bonds dropped 2.0 points (2.6 in investment portfolios) to below 30% of PAM for the first time, whereas foreign bonds with currency hedges rose 8.4 points in PAM (2.5 points in investment portfolios). Multi-asset strategy now accounts for 16.8% of PAM, an increase of 6.5 points from the 2020 survey. < see CHART 2 >
PENSION FUND MANAGEMENT ISSUES
Survey respondents were asked to select pension fund management issues they want to see addressed. The most commonly cited issue was “Review of investment products with rising interest rates in mind” chosen by 54.3% of respondents. “Considering asset allocation in the long-last low interest rate environment", the primary concern in 2020, was second this year, at 49.6% (down 7.4 points). Third was "Considering alternatives to bond assets" chosen by 45.0% of respondents. All top 3 issues are credit-and bond-related.
PRODUCTS CURRENTLY ADOPTED
Bond and credit products accounted for a high proportion of those “already adopted”, including domestic bonds, foreign bonds, and foreign bonds with currency hedges, both passive and active. Unconstrained bonds (multi-assets) were adopted by 37.2% of respondents. < see CHART 3-1 >
Equity-based products were similar with domestic equities and foreign equities, both passive and active, being highly adopted. Sustainable investments, such as ESG (including impact investments) and concentrated investments (including engagement investments) followed. < see CHART 3-2 >
Among other products (excluding the life insurance general account), 65.9% of pension funds adopted a multi-asset strategy, far outpacing equity hedge funds (38.0%) and other alternative strategies. < see CHART 3-3 >
PLANNED INCREASE/DECREASE AMONG PRODUCTS
The trend of reductions and planned cancellations is more pronounced among bond and credit products than equity-based and other products. The highest rate is among domestic bonds (passive), followed by foreign bonds with currency hedges (active) and domestic bonds (active). < see CHART 4-1 >
Among equity-based products, planned increases and adoptions are highest for ESG investments (including impact investments); planned decreases and cancellations are highest for domestic equities (active). < see CHART 4-2 >
In other products, few decreases or cancellations are planned for alternative assets, except life insurance general accounts and insurance linked products. Most private asset products are set for increase and adoption, as are non-private products such as multi-asset strategies and equity hedge funds. < see CHART 4-3 >
CHARTs referred to above:
