Pension funds must thoroughly monitor the most indebted sectors and countries where things are most likely to go wrong, and rebalance and desinvest accordingly, said Dutch risk expert Theo Kocken.
In an interview with Dutch pensions publication Pensioen Pro, he cited the current worldwide debt as one of the most important risks posed by the COVID-19 crisis.
“In the wake of the financial crisis of 2008, we saved the banks, but we haven’t solved the debt problems,” said Kocken, founder of risk management firm Cardano and professor of risk management at Amsterdam’s Free University (VU).
He said pension funds should now thoroughly assess where debt might affect their investments, anticipate the potential consequences and seek out the options for reinvestment elsewhere.
“If worldwide protectionism increases and we have to isolate for months, schemes need to figure out what will cause the most suffering,” he added.
Kocken noted that the slowdown of world trade had made the current situation very fragile relative to previous crises, and warned that protectionism will exacerbate existing problems for the most indebted companies and countries.
According to the risk expert, the potential for a further market dip is real. “The recent fall is the quickest and steepest since 1987, when there was no debt problem in the world economy,” he said.
He added that the way governments fiscally stimulate the economy will be crucial for the long term. “If they get it wrong, the consequence may be a very long recession”.
Kocken said globalisation had made the supply chain very brittle, and advocated change for a balance between what is being done locally and internationally.
“Companies must work out measures for interruptions to their international supply chains,” he concluded.
The professor further highlighed the importance of international co-operation rather than isolationism as the way to tackle the crisis.
“The outcome is to affect the worldwide economy and society for the coming decades,” he warned.
He added that the players involved in fleshing out the pensions agreement between the social partners and the Dutch government can’t ignore the coronavirus crisis.
“You can’t expect them to complete their task in the middle of this crisis, and moreover, social affairs minister Wouter Koolmees is dealing with other priorities at the moment. However, this crisis highlights the need for a new and more simple pensions system that can deal with fundamental uncertainty.”
He said: “What is being discussed now, only increases complexity and vulnerability to this kind of emergency situations.”