Pension schemes have been warned that there will be greater consequences for getting asset allocations wrong going forward, as the gap between returns on different asset classes has grown.

Addressing the PLSA Investment Conference 2023, BlackRock lead client chief investment officer, Sorca Kelly-Scholte, noted that following a period of ‘great moderation’ where for several decades there wasn’t a large degree of difference in return from different asset allocations, the gap in returns is widening.

“You weren’t punished too much if you got your asset allocation wrong [during the great moderation],” Kelly-Scholte said.

“Whereas, going forward, we think there will be a huge difference in the return from different asset classes, and you’ll really be punished for getting an asset allocation wrong.”

This means that schemes will have to be a lot more granular and precise when they think about asset allocation, according to Kelly-Scholte.

“That really leads us to diversifying and thinking about all the opportunities, and getting much more refined about how we put together our portfolios,” she continued.

“Another would be around ‘coasting is costly’. Just having fairly fixed allocations, I don’t think that has been feasible way to approach asset allocation for a time, but even more so now. You need to more dynamic.”

She added that income-oriented assets were “back”, and many of BlackRock’s clients wanted to harness that income as they thought about their endgame, with Kelly-Scholte warning there would be a lot more competition for income-oriented assets.

Speaking on endgame, Kelly-Scholte described it as a river delta: “We are being presented with lots of really quite complex choices.

“There are new innovations and ideas coming through as to how you might manage that run off, capital backing, different ways to run off.

“Also, some choices are being taken away or becoming less accessible, so it’s definitely now a sellers’ market in the insurance space, and that means that buy-ins are maybe not as accessible as they were before and there is a queue forming for buyout.

“These choices are becoming more difficult and they are changing all the time.”

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