Pension fund executives are realigning strategic priorities to cope with potential uncertainties, short-term violent crises, potential rising inflation, commodity prices and a protracted period of low interest rates, a virtual audience heard this morning at the latest IPE Summer Pensions Congress 2021.
During the session ‘Pension leaders in the boardroom – what is top of the agenda of pension boardroom discussions?’ Christian Boehm, chief executive officer of Austria’s APK Pensionskasse, suggested that asset managers will have to “diversify portfolios in a robust way” and will have to shift the focus on how to manage new “risky assets” to reduce volatility.
Last year was a test for pension funds to build resilience with the pandemic causing havoc on markets, he said.
In a previous session this morning discussing how pension funds adapt to a post-COVID environment, André Snellen, chair of the pension fund for the Dutch retail sector, Pensioenfonds Detailhandel, acknowledged that rebalancing portfolios was an innovative mechanism to cope with crises in the future, adding that it was “crucial but scary”.
He said that last year was the first time he had to make such a decision: “We lost €1bn [at the time of the market downturn]. That is a lot of money. And then we had to decide as a board whether to buy stocks.” The fund bought back €1bn worth of equities.
Snellen said rebalancing the fund’s investment portfolio during the pandemic “worked perfectly, [just like] text book crisis management.” He said, however, that “you have to be level headed, very cool, and I wasn’t. I didn’t sleep because of it”.
Other pension funds, including the Pensionskasse for the Swiss canton of Zurich (BVK), took the same decision to buy equities to eventually profit from stock market fluctuations at the peak of the COVID-19 pandemic.
Nacho Hernández Valiñani, chair of Pensions Caixa 30, the pension fund for the employees of CaixaBank in Spain, said assets linked to sustainability performed well last year at the height of the crisis, because companies focused on sustainability have a long-term aim.
Government bonds with low or negative interest rates did not work as expected, he said, adding that such investments “can soften volatility for a while but at the end you are going to have a negative rate”.
Pensions Caixa 30 is, therefore, moving to private market assets that can provide more generous cash flows and returns: “We think that the solution might be partly there,” Valiñani added.
Increasing investments in real assets also helps to prevent from risks connected to unexpectedly high levels of inflation, he said. Pensions Caixa 30 has shifted to inflation-linked bonds hedged to risks, the first one being credit risks, to contain the consequences of price increases.
“As a long-term investor [however] we need some kind of inflation. We are not worried about a reasonable, sustainable level of inflation,” Valiñani said.
As for APK, the scheme is looking at central banks’ policies and their asset purchase programmes to draw up different scenarios of inflation and how to react to it.
“But my assumption is that inflation now is a little bit of an overreaction, so I do not prepare for a long-term, high-level of inflation,” Boehm said.
Rising prices on the commodities market, the impact on other assets and the difficulty to assess whether this is a long or short-term development represent a further challenge for pension funds.
“When we were thinking about inflation and hedging that risk, we were thinking about commodities, but we decided two years ago to not invest in commodities anymore, mainly because of sustainability,” Valiñani said.
He considers commodities at this point in time “a difficult subject”, while looking for “some kind of warranties” to rely on when investing in the asset class but “we still haven’t found a way,” he said.
APK hasn’t been investing directly in commodities and as an investor it has been looking at the developments on the commodity market with a long-term view, Boehm added.