When central banks took on the challenge of saving a drowning global economy during the 2008 financial crisis, pension plans appeared to have plenty to be thankful for.
However, as the U.S. Federal Reserve and the European Central Bank embark on their latest round of monetary stimulus, these policy changes mean pension plans are now operating in a radically different financial environment, according to a survey by French asset management firm Amundi and CREATE-Research.
The survey asked European pension plans whether quantitative easing has proved to be a blessing or a curse. “After averting a 1929-style global depression in the wake of the Lehman collapse in 2008, central banks in key economies have faced the Herculean task of unwinding their crisis-era emergency measures, involving zero-bound interest rates and large-scale asset purchases,” it said. “Ten years on, advanced economies have continued to operate below their natural speed limits. QE has reached the point of diminishing returns, while denting the credibility of its principal architects.”
The survey respondents appeared somewhat split on the effects of quantitate easing. About a third (36 per cent) said it has kick-started the global economy’s growth after the collapse, and two-thirds (67 per cent) said it stabilized markets after the collapse of Lehman Brothers Holdings Inc. However, 78 per cent said quantitative easing has inexorably inflated global debt, sowing the seeds of the next crisis, and 50 per cent said it’s undermined the longer-term viability of pension plans.
As far as the steps that pension plans are taking in new environment, 62 per cent said they rely on liquidity management to mitigate risk as volatility in the market rises. About the same number (61 per cent) said they use risk-factor diversification to preserve and grow their capital. More than half (55 per cent) said they pursue specific sector investment themes in looking to achieve growth amid the broader global economy and 51 per cent said they’ll continue to rely on illiquid assets to reduce mark-to-market volatility.
Two-thirds (66 per cent) also said they’re focused on reducing pension plan costs as one way to make up for less thrilling return expectations. Another 59 per cent said they’ve strengthened the investment expertise of their boards.
“Pension plans expect to go into the next recession with their finances weaker than ever,” the report noted. “Hence, their current aims are to conserve capital, manage liquidity, plan for mean reversion and reduce mark-to-market volatility. They are investing in a range of quality public and private market assets, and increasing their holding periods to avoid the episodic dearth of liquidity.”