From Our Perspective: Two decades of shifting perspectives
This spring marks 20 years since the first issue of IPE. Our founders Piers Diacre and Fennell Betson started this publication with an assumption that funded pension systems would become more widespread in time, leading to increased diversification and a need for clear, well-researched and well-presented information.
When IPE first appeared, Tony Dye of Phillips & Drew had not long called the FTSE 100 overvalued at 4,000, Norway had transferred the first tranche of money to its new sovereign wealth fund and ABP had recently been privatised. The year of our launch saw the introduction of the UK’s minimum funding requirement (MFR). The European Commission published a green paper that paved the way for the IORP Directive. Sweden presented a report outlining its PPM supplementary pension system. As the Asian crisis unfolded, eyes were on the launch of the European single currency in 1999 and the wave of asset diversification that was set to follow.
Pension assets have indeed grown exponentially but they are still concentrated in countries like the US, UK, Canada, the Netherlands, Switzerland and a few other countries. The EU has urged member states to expand second-pillar pensions, but progress remains slow.
Interest rates have trended downwards since the early 1980s to negative levels in some cases by the mid-2010s. The transition to the reality of persistent lower rates, depressed pension funding levels and lower investment returns overall has been difficult. Widespread underfunding of defined benefit (DB) schemes has prevailed, exacerbated by market downturns. Demographics, the transition away from traditional DB pensions and regulation has led to an increased focus on risk management and has spawned the growth of liability-driven investment approaches.
Environmental, social and governance investment approaches have gained ground but their stronghold is still, in many cases, the world of public pension funds. A wider debate about the nature of fiduciary duty is ongoing in relation to areas like climate change and the move to green energy sources.
In asset management, a democratisation of investment through vehicles such as exchange-traded funds has made previously esoteric investment approaches available even to the smallest investors. This democratisation has also led to unparalleled complexity and unprecedented product proliferation, much of which works against pension funds’ interests. The asset management marketplace is littered with failed and obsolete investment products and concepts. Pension funds have rightly challenged the investment sector to be more transparent about costs, and they have become wiser and more realistic about the potential of hedge funds and other alternative investments.
There has been innovation in pension scheme design, but more in thought than deed. The (artificial) binary division between DB and defined contribution persists, despite some innovative blueprints for individual risk-sharing systems, such as defined ambition.
Looking back at all these challenges, it seems obvious that pension funds are more relevant than ever before – as sophisticated investors, stewards of long-term wealth and custodians of a key element of national retirement systems. Together they are responsible for the welfare of millions of citizens. In 2017 we look ahead with some trepidation to a new relationship between Britain, our home base, and the EU, and what this will bring. But this will not dim our focus on pension and investment issues across the entire European continent as we look ahead to the challenges of the next 20 years.