Ask The Experts - Quater 2, 2013 - Part 4
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The document discusses the current and future landscape of pensions, citing improvements in markets and economies but cautioning about underlying risks that remain unsolved. Experts emphasize the importance of pension funds having clear objectives and risk management strategies to navigate uncertainty. Additionally, in the Netherlands, there is growing pressure for pension funds to support the economy through investments, alongside potential changes in pension frameworks.
Ask The Experts - Quater 2, 2013 - Part 4
- 1. ASK THE EXPERTS Quarter 2 - 2013 Q: What does the future pensions environment look like?
- 2. ASK THE EXPERTS Quarter 2 - 2013 Nick: I’m not very keen on making predictions but I will try and give some sort of view on where we are today and what might happen. We have seen quite a substantial move in risk assets, over the last few month up until the end of March (2013) with equities and credit doing pretty well. That could be seen as an indicator that the economic and market environment has begun to turn for the better and materially so I think there are some genuine signs of improvement. The US economy seems to be recovering quite solidly, the risks of a big slowdown in China appear to be past, and whilst the Eurozone is still trundling along at a very low level of growth there have been words spoken and actions taken in terms of ‘doing what it takes’ to maintain stability there.
- 3. ASK THE EXPERTS Quarter 2 - 2013 But I think if you want to be a bit more cautious one would say that the upward move in markets isn’t really indicative of a materially better economic environment. I think its partly a function of the very low returns available on low risk assets such as cash and bonds, it’s also a function of liquidity that has come in to the system through quantitative easing and other stimulatory policies, and to be honest it’s a bit of boredom by the markets. They have been worrying about the same issues for so long they have got a bored. They have said we know all about the Euro issues, we can’t go on exciting ourselves about them, so let’s buy equities anyway and see what happens. That’s a bit crude perhaps but there is an element whereby market sentiment has changed for the better without any real underlying reason, I don’t think.
- 4. ASK THE EXPERTS Quarter 2 - 2013 The long term problems of de-leveraging of the system, Euro instability, US fiscal issues, haven’t been solved at all, they are still out there, but the markets are just ignoring them for now. Maybe the future has improved a little bit but I don’t think we are through this particular part of the cycle and on to the “sunny uplands” of steady and recovering growth or above trend growth. We remain reliant on monetary stimulus and I do think the risks of set-backs are also still meaningful.
- 5. ASK THE EXPERTS Quarter 2 - 2013 Matthew: Nick has rightly focussed on economic and market issues. Perhaps I will take a slightly different slant on this and I will answer as regards the future for pension funds themselves. If we go back a few years, some funds really got to grips with defining their objectives and risk appetite prior to the credit crunch. Now, not many but a number of funds have done that, and those funds who did have been able to come through the past few years relatively unscathed. So a lesson I guess I take from that is whatever the future holds it includes considerable uncertainty. Those funds that have clear aims, and a detailed journey plan and that have a balanced approach to covenant, funding and investment, I think, are most likely to stay on track whatever the future brings.
- 6. ASK THE EXPERTS Quarter 2 - 2013 Jelle: I agree with both sentiments that Nick and Matthew voiced, and in the Netherlands certainly there is also an awareness that sentiment might have changed but the fundamentals haven’t really. An interesting development is the increasing political/public pressure for pension funds to use their assets to help the Dutch economy and very recently there has been an initiative to create a national investments vehicle that would issue state guarantees for residential mortgage backed securities. The idea being that pension funds should invest in them and in that way kick start the Dutch housing market back in to action. I expect a lot of firms to really consider that opportunity driven by the public pressure or because the extra investment pick-up might be interesting for a state guaranteed security. They might consider it as a substitute for (Dutch) government bonds.
- 7. ASK THE EXPERTS Quarter 2 - 2013 Another development is the new draft pension agreement, a process going on for years now - and has recently been postponed again. Once the agreement becomes law, there will be two flavours of pension frameworks. One with hard nominal liabilities - a bit like the present framework, but, with harder risk management and stronger risk and buffer requirements. The other will be more like the UK with real liabilities, with inflation indexation but where the investment risk would be taken by the participants rather than the corporate and participants together. It is expected that pension funds that choose the latter variant will change their asset mix and will take more risk in order to achieve the investment returns that can meet their real ambitions.
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