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.”