European defined benefit (DB) pension fund managers are “cautiously optimistic” about the year ahead and are leaning towards fixed-income investments, according to Goldman Sachs Asset Management.

Its inaugural European Pension Survey: Finding Opportunity in Uncertain Markets, which polled 126 senior DB pension managers, found that respondents believe investment grade debt and private credit will generate the highest risk-adjusted returns in the next year, with nine in 10 survey respondents planning to increase or maintain these allocations.

Speaking at a webinar to launch the report, Goldman Sachs Asset Management co-head of multi-asset solutions and global head of sustainability for public investing, Valentijn van Nieuwenhuijzen, said: “This is the first time we have run this survey across pension funds in Europe and the UK. But I’m quite convinced that if you would have run this one or two years ago, the cautious optimism that seems to be expressed now… would have looked a lot different.

“Going through the coronavirus crisis, the shock to the system afterwards, the inflation spike, rising interest rates and central banks tightening aggressively, a liquidity crisis running through, especially the UK gilt market. All of that had clearly fed into a more cautious stance amongst pension funds and insurance companies and that has shifted over the year. If you now look at the responses, close to 60 per cent are either seeing the current environment as significantly better or somewhat better.”

Almost seven in 10 managers (68 per cent) believe private credit has the potential for increased returns without a corresponding increase in volatility, while two thirds (65 per cent) plan to allocate to this asset class over the next three to five years.

Giving context to this, another webinar speaker, Goldman Sachs Asset Management head of UK fiduciary management, Ed Francis, said: “The backdrop for pension funds is, by and large, improved funding ratios for many schemes as discount rates have risen significantly and most schemes not being fully hedged against those interest rate rises. We have seen a lot of schemes benefit from a much-improved funding state and therefore they are thinking very differently about their investment challenges than they were a couple of years ago.”

Furthermore, the survey found that 87 per cent of respondents incorporate sustainability as a critical or important factor in their decision-making process, and almost two-thirds (63 per cent) allocate more than 10 per cent of their portfolio to sustainable investments. In addition, most respondents (84 per cent) believe integrating ESG criteria into investment decisions can help reduce long-term risks, and more than half say this approach can generate alpha.

“That just underscores how in the European region sustainable investing is becoming a central part of the way in which pension funds in particular are thinking about their asset allocation,” Francis commented.

However, when it comes to risks, European pension funds said geopolitical risks in general are the biggest threats to their portfolios in the year ahead. More than 70 per cent of pension funds consider geopolitical tensions and political events as the biggest risk to their portfolios.

On the regulatory front, disclosure requirements under the Sustainable Finance Disclosure Regulation (58 per cent) and upcoming climate stress-testing requirements (55 per cent) were cited as the most challenging developments for funds to implement. In the Netherlands, the new pensions contract was cited by 86 per cent of respondents as one of the most challenging regulatory developments, highlighting the Dutch pension sector’s focus on the transition from DB to DC schemes.

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