Lower returns over the longer term would not be a disaster for pension funds, according to Else Bos, chief executive at the €200bn asset manager PGGM.

In an interview with IPE sister publication Pensioen Pro, Bos said low inflation could help pension funds cope with low returns.

“We don’t really need returns of 8%, as pension funds now base their contribution levels on an interest rate of 2% to 2.5%,” she said.

“Because the European Central Bank is targeting an inflation of slightly less than 2%, returns of 5% would be sufficient to meet pension fund liabilities.”

Bos, PGGM’s former CIO, said the 8% average returns of recent decades were untenable in the current economic climate.

“The very low interest rates are resulting in increased savings rather than increasing consumption and investment, which doesn’t generate new jobs or growth,” she said. 

She said pension funds could boost returns by bringing asset management in-house, and that PGGM was building the necessary expertise to manage illiquid investments such as infrastructure and private equity.

“By removing the expensive intermediate layer, we can reduce our costs by up to 200 basis points,” she said. 

“Moreover, in-house management enables us to take into account the issues that are important to us, such as sustainability.”

Bos acknowledged, however, that costs – including staff remuneration – posed a potential hurdle for in-house management, as pay is very much under scrutiny in the Dutch pensions sector.

In particular, investment experts for infrastructure and private equity usually demand sizeable salaries.

“Any tightening of legislation for remuneration would make it increasingly difficult to hire the expensive specialists we need to reduce costs,” she said.