Investment Philosophy: What attitudes are guiding scheme investments?

Before a pension scheme can plan an investment strategy with its asset manager, it has to determine what its investment goals are and the parameters within which those goals are to be achieved – also known as its investment philosophy.

As part of our broader buying cycle content, Pensions and Benefits Market Solutions is looking into the investment philosophies of UK schemes, and to kick things off we asked our Pensions Buzz audience where they stood on the following high-level investment concerns.

The results of our poll revealed some interesting themes and confirmed a number of predictions.


Key Findings
Pensions are, by their nature, long term investments. It’s therefore unsurprising that 69% of schemes pursue long term growth over short term growth.

As our results also show, the main philosophy used by schemes to realise this aim is diversification – and it’s a philosophy which manifests in several ways.

Diverse Risk Appetite
Our findings show that pension schemes value a mixture of risk levels in their portfolios, though on balance they prefer their investments to be weighted towards the low risk end of the spectrum.

Diverse Liquidity
Most respondents are on the fence when it comes to liquidity, indicating that portfolios are diversified across high and low liquidity investments.

The results show a slight bias towards high liquidity investments. This is likely to be a consequence of schemes wanting to avoid being caught short on their liabilities, and ensuring that they keep a stream of funds available for retiring members.

Diverse Management of Portfolio
Schemes use active management more than passive management, but only by a narrow margin. The broad picture is one of diverse management techniques.

A preference for active management could be for many reasons – the comfort of professional expertise in complex markets, improved performance, or the need to outsource what would otherwise be an involved and time-consuming task for the scheme.

Given the fees associated with active management, it is likely that schemes are reserving their use for the most specialised parts of their portfolio.

Diverse Volatility
Our findings suggest that schemes are willing to accept a degree of volatility in their investments, but that they value smooth growth over erratic gains.

The question of ESG yields varied opinions. 29% of schemes feel that it is decidedly unimportant. 0% say the opposite.

On balance, the UK pensions industry doesn’t view it as an important part of their investment philosophy. Whether this outlook changes, in light of the clear importance of long term stable growth to schemes, remains to be seen.

That concludes our quick overview of scheme investment philosophies. In following entries, we’ll look in more depth at how schemes develop their investment philosophies and what asset managers can do to ensure that they’re working in alignment with those tenets.