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An old and true saying is that whether President or Queen, tailor or baker, pension fund or single investor, everyone puts their pants on one leg at a time.

It’s an easy thing to forget, especially when the pension fund world in particular wears seemingly much larger and more impressive pants than the rest of the investing world, and in turn represents thousands of individual pensioners’ pants who are counting on sound investment of their socked-away money to carry them through their golden pant-wearing years.

But despite having millions if not billions to allocate, like the saying implies, pension funds put their pants on one leg at a time too. And in turn they can and do act just like the rest of us when financial markets are tanking and all you-know-what is breaking loose, according to Aon-Hewitt’s 2011 pension fund survey (click here [pdf] to download).

Just like the rest of the investing world, pension funds in 2009 grabbed their money wherever they could and ran for cover – to cash, to bonds and to long-only managers that seemingly offered better protection than the alternative hedge fund mangers that they and their peers had eagerly piled into before the global crisis.

Indeed, as the survey notes, pension funds have moved pretty decisively from post-2008 panic to measured re-entry into the hedge fund space, with pretty much the same idea as before: to broaden their portfolio mandates through diversification into strategies that don’t necessarily correlate with stocks and bonds.

Click images to enlarge

The move back to alternatives isn’t exactly a stampede. For starters, few pension CIOs have forgotten the dark days of 2008 and 2009, when extreme volatility in funding levels (at one point during 2009, funding levels fell by 6% in one day!) saw plan sponsors considering an unprecedented number of activities, or potential activities, to manage their pension plan risk.

Rather, there is a much more measured and reasoned approach to dealing with continued pension deficits that despite the concerns they entail are still pushing CIOs and investment boards to hedge funds and other alternatives, according to the report.

Deficits alone continue to be a catalyst for driving more pension fund money to alternatives. According to the survey, which focuses primarily on Europe, pension funding levels in early 2011 were pretty much where they were in early 2010, at around 75%, having dropped as low as 65% towards the end of Summer 2010. The chart below shows intentions of investment changes among pension funds).

Hedge funds or any other type of investment aside, one pensions are keenly focused on is keeping the doors open and the flow of money running from contributors to retirees. Post 2008 when things didn’t look particularly promising, many pension funds opted to close, freeze their payouts or at least switch to defined contribution.

Fast-forward to almost three years later and while plan closings and freezes continue, but a large percentage of U.S. plans continue to accrue benefits for at least some portion of the employee population.

And while the majority of surveyed plans are closed to new entrants, most sponsors that were contemplating full plan freezes in 2009 chose not to do so. For now, it seems, the plan freeze decision has been asked and answered, and for about half of the survey respondents the answer was “No” or, at least, “Not now.”

Again, same pants.

Overall, survey results show a greater awareness of pension risk, an understanding of the capabilities and limits of the available risk management tools and an acceptance that achieving a manageable level of risk takes time, planning, and patience—but that it actually can be done.

How it’s done – particularly from the investing side of the equation – remains to be seen, but clearly the kiss-and-make-up mentality between hedge funds and pensions that we have been writing about for a while now factors in to some degree.

We just hope that like last pension funds don’t shuck their pants to run faster during the next global financial market crisis.

Source: Dressing Your Pension Fund: One Leg At A Time