Tuesday, January 22, 2008

Pension Plans Begin Changing


Top U.S. Pension Plans Increase Alternative Investment Allocations
The nation's largest defined benefit plans have substantially increased their allocations to alternative investments, including hedge funds and private equities, during the 12 months ended Sept. 30, according to data compiled by Pensions & Investments.
In contrast, allocations to U.S. stocks by the top 1,000 fell to 40.7% of total assets, down from 43.7% the year before. U.S. fixed-income allocations fell to 23.9% from 25.4%.
However, despite the rocky financial markets of 2007, the nation's largest 1,000 retirement plans enjoyed their strongest growth rate in a decade, up 13.5% to $5.4 trillion, in the 12 months ended Sept. 30, according to P&I. Meanwhile, defined contribution plans, such as 401(k) plans, increased 14.5% to $1.71 trillion.
However, prospects look glum for 2008, as pension executives anticipate disappointing returns for almost every asset class.
More detailed data affecting the 200 largest defined benefit plans -- with $5.6 trillion in total assets -- for periods ending Sept. 30, 2007, reveal that hedge fund investments rose 51%. By contrast, hedge fund investments grew 69% the year before. The largest hedge fund investors were: the Pennsylvania State Employees' Retirement System, at $10.6 billion; the California Public Employees' Retirement System, at $6.2 billion; and the New York State Common Retirement Fund, at $5.4 billion.
Private equity investments also increased sharply. Buyouts grew the most, 53%, to $108.4 billion; distressed debt investments rose 27% to $10.5 billion, and venture capital grew 20% to $28.5 billion. Pension funds also made significant allocations to commodities and infrastructure.
Equity real estate investments increased 13.5% to $170.3 billion. The prior year, real estate equity assets grew 30%. Investments in international real estate jumped 96% to $15.7 billion, as U.S. pension funds started pouring money into foreign real estate. International investments grew 16% to $538 billion from the previous year. Actively managed international equity investments totaled $478 billion, while active international fixed-income assets reached $60 billion.
Indexed assets, those that track established benchmarks, dropped 0.9% to $862.1 billion, while investments in enhanced index strategies, which take on modest amounts of risk over "plain vanilla" index approaches, grew 15.5% to $359.8 billion.

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