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Real estate allocations within retirement saving schemes

This call for research closed on 31 July 2012 and the content on this page is for information only

Over the ten years to 2010, Defined Contribution (DC) schemes’ share of UK pension funds is estimated to have risen from 3% to 40%, amounting by the end of the decade to in excess of £500 billion. This has been largely at the expense of Defined Benefit (DB) schemes. Confronted by increasing longevity, a changing regulatory environment and weakening of sponsor covenants, the majority of DB schemes are now closed to new entrants.

The shift to DC can therefore be expected to continue, and have a significant impact on asset allocation decisions. According to a recent report by the EDHEC -Risk Institute and sponsored by AXA Investment Managers, DC pension schemes are "under-diversified" and need to adopt asset-liability management strategies to tackle inflation and longevity risks.

Proposals are sought to research the impact this move might have on the way assets are allocated in pension funds. The Institute & Faculty of Actuaries (IFoA) is concerned about how the change will impact on overall exposure to equities, bonds and other investment options, whilst the Investment Property Forum (IPF), European Public real Estate Association (EPRA) and Association of Real Estate Funds (AREF) are particularly concerned to ascertain what might be the results of the DB to DC shift in terms of exposure to commercial property.

The joint sponsors wish the study to focus on the following three inter-linked issues:

  1. The size of the current DC market; the decision-making process for the default option in DC schemes; existing (if any) allocations to real estate; and the role of investment consultants in determining asset allocations.  This paper will feature a survey of representative UK DC schemes.
  2. Expected changes to the overall retirement planning and savings market in the UK, including the impact of demographic and regulatory changes on the schemes provided.
  3. Subject to the conclusions of 1) and 2) above, how real estate in its various forms can successfully be incorporated into DC and other pension schemes, or vehicles that can be used for retirement savings, particularly given the liquidity requirements of DC platform providers, and taking into account tax considerations.  

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research@actuaries.org.uk

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