New CAMRADATA whitepaper explores opportunities & risks for pension funds
CAMRADATA’s latest whitepaper, Trends for 2021 considers pension fund investment strategies and asks how schemes will refine their asset allocation to meet their funding and liquidity requirements in the current investment conditions.
The whitepaper includes insight from guests who attended a virtual roundtable hosted by CAMRADATA in December, including representatives from Newfleet Asset Management, Prestige Funds, State Street Global Advisors, Border to Coast Pensions Partnership, Russell Investments, XPS Pensions Group and Secor Asset Management.
The report highlights that with retirees living longer and the average age of pension scheme members getting older, some asset owners are finding it difficult to guarantee the cash flow required to meet payments to retirees. In this uncertain economic climate, some sponsoring companies are also finding it challenging to meet their funding commitments and to fulfil their employers’ covenant.
Sean Thompson, Managing Director, CAMRADATA said, “Confronted by a weak dividend outlook through 2020 and into 2021, some pension funds are increasing their allocations to investment grade, and sometimes high-yield, corporate debt to meet their cashflow needs. But they need to be watchful of a spike in default rates in corporate bond markets as governments wind down emergency support measures.
“Traditional areas of fixed income are likely to return very little in the short to medium term. Consequently, pension funds need to assume greater investment risk to generate a similar level of return that, 10 or 15 years ago, they could generate from their core bond holdings.
“More broadly, the Covid-19 pandemic has also forced the industry to re-examine its goals and ways of working. It has forced pension funds, and the asset managers and custodian banks they appoint, to move to remote working and to apply technology in new ways to deliver business continuity.
“Our panel considered which trends will shape this year for investors. High on the list of considerations were ESG, the economic recovery from COVID-19 and inflation.”
The panel also discussed the biggest concerns for Defined Benefit pension schemes, including responsible investment strategies; long-term funding; the deterioration of scheme covenants’ impact on net cashflows; recovery from COVID-19; climate change; inflation and technology.
Another key concern is that US-China tensions will not go away simply because America has a new president. The panel discussed these concerns and the impact they may have on investment strategies, before moving on to examine the effects of COVID-19 from the perspective of employers and their pension schemes and finishing with a discussion on gold.
Key takeaways points were:
- A guest suggested that asset allocations were going to change in 2021, but predicted disinvestment from all risk assets, including some alternatives. The cause of this switch will be stagnant equity markets starting to reflect the underlying malaise in the economy. They also suggested that institutional investors will seek greater safety in gold.
- Another guest gave more bullish predictions. They believe that equities will be one of the best-performing asset classes. The underlying rationale is that both households and corporates are sitting on huge amounts of cash.
- The panel discussed overconfidence that was overflowing in financial markets. The FTSE (at the time of the roundtable) was up 20% up since October’s announcement regarding a likely Covid vaccine.
- One guest questioned whether the news justified the increase, and warned that investors had to keep their eyes wide open on what is happening at a local level versus the markets.
- Another said the economy is in a mess while spread levels and equity levels are back where they were before COVID-19 struck. A natural conclusion is that markets offer less value now than they did then.
- The panel warned that the next 24 months will expose those companies that have not grown earnings.
- The panel ended by discussing gold, with one guest highlighting it would form a greater part of institutional investors’ portfolios as 2021 proves to be another year of disappointments.
- Another said that “Gold is an insurance; you don’t buy insurance after an accident. You buy it because you do not know the future. That’s why you always keep a small portion”.
The conversation came back full circle to the economic outlook for the year ahead, with a final point from a guest, “I hope the optimists are correct but in the USA I am very worried about COVID. My big concern colours my whole outlook.”
FINANCIAL INCLUSION WITHIN DIGITAL PAYMENTS
NICK FISHER, GENERAL MANAGER, SALES AND MARKETING UK, JCB INTERNATIONAL (EUROPE) LTD.
The shift towards an economy that removes physical cash has long been on the horizon in many regions. Sweden is an example of a country rapidly heading this way. Two years ago, just 1% of Sweden’s GDP was circulating in cash compared to 11% in the Eurozone, and research by the Swedish Retail and Wholesale Council showed half of the nation’s retailers saying that they probably would not accept cash after 2025.
In 2019 in the UK, cash payments decreased by 15%, although physical money was still the second most frequently used method comprising of 23% of all payments. The Financial Inclusion Commission in the UK states that there are over 1 million people that do not have a bank account, and the World Bank estimates that there are some 1.7 billion adults globally that still lack access to a bank account.
The finance industry has collaborated over the years to develop various credit products for affluent communities. These customers are considered a lower risk. However, institutions should continue to prioritise the advancement of services to serve an audience which remains – ‘unbanked’. Research by EY showed that financial inclusion could improve GDP by up to 14% in more rural, developing economies like India, and by 30% in frontier markets like Kenya. While the positive reasons for fully embracing digital payments and eliminating physical cash are plentiful, including lower payment processing costs for the retailer and customer convenience, physical cash provides the ‘unbanked’ with the ability to function day-to-day with a legal tender.
To establish digital solutions for the unbanked, payment players should adopt an inclusive mindset. The race towards a digital cash society will naturally get closer to the finish line with the passing of each generation, but governments could lend a hand to the unbanked by encouraging financial institutions to sponsor organisations that provide legal quasi digital cash products. In my opinion, the financial industry has an important part to play in developing low cost solutions to support the unbanked with authentication tools – such as biometrics and risk tools to manage real-time credit risk reporting with anywhere accessibility.
In both developing and developed countries, QR codes can play a superhero role as they offer simple, low-cost ways of processing payments on basic mobile phones. In June last year, we collaborated with FIS to enable cross-border QR codes in the APAC region. The ‘Worldpay from FIS 2020 Global Payments Report’ found that digital wallets, at the time, accounted for 58 % of regional ecommerce purchases and were expected to reach almost 70 % percent by 2023.
In developed regions, we are issued with a formal identification when we are born, no matter our circumstances, and this comes in the form of a birth certificate or, later in life, a passport. This does not always happen in developing countries as resources are often limited. Yet, advances in biometric technologies, such as fingerprint or palm vein may offer a solution to the requirement for proof of identity to open a bank account or to create a mobile wallet. Biometric organisations, payment leaders and innovators, such as Google Pay and Apple Pay, have partnered to make this a reality, despite the initial cost implications for development.
In summary, understanding the reasons for why some prefer physical cash, and others prefer digital cash, provides holistic learnings to achieve a society that ultimately uses digital cash only. Empathy is paramount for building customer-centric commerce. For me, at least, a world without physical cash cannot be considered responsible, or fair, until everyone can be accommodated.
THE EFFECTS OF JOB HOPPING ON YOUR RETIREMENT OUTCOME
By Neli Mbara, Certified Financial Planner at Alexander Forbes
Job hopping – defined as spending less than two years in one position – is a very controversial subject. It can be an easy path to a higher salary but can also be a red flag to prospective employers, not to mention your future financial goals if you are cashing in your retirement fund every time you make a move.
When changing jobs, whether it be once a year or once every decade, one has to make decisions regarding career growth and retirement plans which affect one’s long term financial plans. One of these decisions is ‘what to do with my retirement fund?’
For many people, the first thing that comes to mind is using their pension money to pay off their debt. Alexander Forbes Member Watch statistics show that 91% of members do not preserve their retirement savings when changing jobs. As we are living in times where most household income is used to finance debt, most people use job hopping to gain access to their retirement funds, and use this money to pay off debt. However, a quick fix and instant gratification comes at a price, which in this case could be a delay in your retirement plan.
Your retirement savings are simply for that, your retirement, to pay you an income once you stop working.
Early access of your retirement fund can result in:
- Not having enough money at retirement – this is simply because most of us are already not saving enough for retirement
- Robbing yourself off the compound interest you could have potentially earned from the investment.
- Never making make up for the lost benefit
- Creating a bad habit that will delay you from achieving your retirement plan and desired income at retirement
It is easy to cash in your money from a retirement fund at resignation but it is much harder to make up for the lost benefit (capital cashed in plus interest). Calculations show that for you to make up the lost benefit depending on your retirement age and investment time horizon, you will likely need to invest more than double your contributions towards a retirement fund.
Since only 6% of the South African population are reported to have accumulated enough to retire comfortably, without having to sacrifice their standard of living, you will most likely have to invest much more towards your retirement fund to make up for the lost savings.
Therefore, leaving your retirement fund invested and preserved in a preservation fund is the recommended option when changing jobs, as this keeps you committed to your retirement plan.
Changing jobs is a life-changing event, and it is therefore important that you seek advice from a professional financial adviser who will guide you in your retirement planning ensuring that your retirement needs are taken care of, by providing solutions that help you to ensure your financial wellbeing.
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