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Pension Plans Running on Empty…Even Tho They Like Hedge Funds

The hedge fund industry made much of a  pension plan poll from SEI issued this week which highlighted how pension plans are again warming to “alternative investments”, in particular hedge funds. But the more interesting nuggets in the SEI survey showed that — hedge funds or no — pension plans are running scared.

More than half – that’s 50 PERCENT — of pension portfolios are now closed or frozen. Remaining fully funded was a greater priority in 2010 than worrying about absolute returns. Scary stuff.

The SEI (SEIC) Quick Poll released this week showed a significant increase in the percentage of pension portfolios investing in alternatives, when compared to the previous two years. In 2008, 51 percent of pension executives surveyed invested in alternatives. In 2009, that rose to 53 percent, and in 2010, 65 percent of the poll participants.

But 88 percent, or “nearly all pension executives viewed improved funded status as a benchmark more important” than any other issue, including increasing absolute returns, the poll reported. That was followed by improving funded status, creating a long-term pension strategy, stress-testing the portfolio, increasing due diligence, and defining the role of consultants and investment professionals providing advice to pensions.

“Funding deficiencies are getting the attention of various stakeholders in companies and, as a result, boards and senior management are looking for long-term strategies as this scrutiny continues,” Jon Waite, Director, Investment Management Advice and Chief Actuary for SEI’s Institutional Group said. “A plan’s funded status is the top priority as liabilities are being managed within a larger, organizational, risk management framework.”

Back to hedge funds: bigger pensions aren’t afraid of them, according to SEI polls. Of pensions with more than $300 million in assets, more than three-quarters (77 percent) invest 11 percent or more in alternatives. By comparison, 42 percent of pensions with less than $300 million in assets invest 11 percent or more. Real estate (77 percent), private equity (54 percent), funds of hedge funds (47 percent), and single manager hedge funds (30 percent) are the most common alternatives.

Here’s the final scare: more than half of pensions are closed to new entrants and accruals have ended for current participants. According to poll respondents, 53 percent of the pension plans are either closed or frozen, up 10 percent versus 2009. compared to a similar survey conducted in August 2009. However, funding deficiency was not the only factor in preventing organizations from terminating their plan. Respondents were asked if their plan were fully funded, would they still look to terminate the plan as soon as possible. Of those that already have frozen their plan, nearly three-quarters (73 percent) said they would look to terminate the plan. Of those with active plans, 75 percent said they would not look to terminate it.

The poll was completed by 85 pension executives overseeing assets ranging in size from $25 million to $10 billion. Of the respondents, 36 percent oversee more than $300 million in assets. None of the respondents were institutional clients of SEI.

For a copy of the complete survey results, please email seiresearch@seic.com.


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