Ahead of the Curve covers developments that may impact the behavior and portfolio positioning of institutional investors. Take a closer look at events in the ever-changing regulatory, legislative and investment markets to determine how they may impact you.
As life expectancies in developed economies rises, governments will need to raise minimum retirement ages to ensure the health and adequacy of nation pension systems, according to a report by the Organisation for Economic Co-operation and Development.
The report, "Pensions Outlook 2012," also notes the need for expanded coverage provided by private pension funds.
During the next 50 years, life expectancy in developed economies is expected to increase by more than 7 years. The long-term retirement age in half of OECD countries will be 65, and in 14 countries it will be between 67 and 69.
Among the 34 OECD countries, 28 are implementing or planning to implement increases in retirement ages. These increases, however, are expected to keep pace with improved life expectancy in only six countries for men and in 10 countries for women.
The report suggests governments should consider formally linking retirement ages to life expectancy, as is currently the case in Denmark and Italy.
In addition, the report finds that reforms during the past decade have cut future public pension payouts, typically by 20% to 25%. People starting work today can expect a net public pension of about half their net earnings, on average, in OECD countries if they retire after a full career at the official retirement age
However, in almost all of the 13 countries that mandate private pensions, pensioners can expect benefits of around 60% of earnings. In contrast, in countries where public pensions are relatively low and private pensions voluntary, such as Germany, Ireland, Korea, Japan and the United States, large segments of the population can expect major falls in income upon retirement.
Institutional investors use of exchange-traded funds (ETFs), previously relegated to manager transitions, rebalancing and other tactical applications, has taken on a more strategic role, according to a study by Greenwich Associates.
The study, conducted during February and April of this year, found 57% of all institutional ETF users â€”38% of asset managers and more than 60% of institutional funds â€” use ETFs for strategic allocations. A year ago, a quarter of asset managers and 50% of institutional funds said they used ETFs for strategic purposes.
The report also noted the pressure on investors contrasts with regulatory initiatives, such as Solvency II and Basel III, that are aimed at making the institutions safer. According to the report, there is a risk to overall financial stability as these forces could cause institutions to act more like short-term investors and less like the long-term â€śdeep pocketsâ€ť that hold assets throughout market cycles.
"Many institutions consider strategic applications to include liquidity overlays or longer-term overweights, perhaps to an asset class or a single country, especially if the security is held for more than 12 months," said Jennifer Litwin, a senior director at Greenwich Associates.
Two new Northern Trust papers provide detailed guidance for improving the portfolio transition process.
"Transition Management: How to Effectively Manage Risk When Transitioning Assets," emphasizes the need for preparation, even if a portfolio transition isn't imminent. Among the steps the paper recommends are:
"Transition Management: Fixed Income â€” Adding Transparency to an Opaque Market," addresses the nuances of transitioning a bond portfolio and stresses the importance of dealing with a transition manager with expertise in bond valuations and trading.
The paper details the transitioning of various fixed-income instruments, including municipal bonds, mortgage-backed securities, fixed-rate collateralized mortgage obligations and corporate bonds.