Pension funds' hands tied on low-yielding sovereign bonds – APG
EUROPE – Pension funds cannot forsake low-yielding, safe-haven sovereign bond investments entirely, despite their return often being outstripped by inflation, APG's head of asset liability management has said.
Speaking at the recent GNP conference in Milan, Onno Steenbeek also warned against the "real threat" of longevity increases and lamented that actuaries had never been able to overestimate potential increases in life expectancy of pension fund members.
"In the history of the profession, actuaries have never overestimated life expectancy," he said. "In general, if you expect a return of 6%, then you can say it will be higher or lower. In this case, there is no evidence it can go down."
Steenbeek, also a professor of pension risk management at Erasmus University Rotterdam, said the "big issue" facing the industry was how it could continue investing in either Dutch or German government bonds with historically low yields.
"[On 16 May,] there was a new issuance of 0.5%, with inflation of 2.5% – that makes it very unattractive," he told the conference. "Still, it's a safe haven we probably need – and the regulation limits us to do much different."
Speaking during the same panel, Robert Brown, chairman of Towers Watson's global investment committee, noted that the consultancy had been wary of parts of the fixed income market for some time.
"You are not getting paid the return premium you should expect to get paid for the market," he said. "That's not to say we think there will be a bond market crash in the next year. However, we do think bonds look very unattractive on a 3-4 year horizon."
Brown explained that the view stemmed from a belief that markets had an "overly pessimistic" view of the world, and that rakes were likely to see bigger moves than had been accounted for by the discounted forward rate.
The senior investment consultant went on to question the wisdom of pension funds diversifying into certain alternative asset classes over the past two decades.
He cited Towers Watson statistics showing that global exposure to 'other' asset classes had risen by close to 15 percentage points since 1995.
"That 'other' is a shift towards more diversity, alternatives, real estate and so on – you have seen a big shift here," he said.
"But the problem with this shift is that it's helped diversity but increased cost for institutional investors. You have to weigh up that trade-off and question whether that's been such a great boon."
Toine van der Stee, director of the Blue Sky Group in the Netherlands, noted that diversification of investments had caused some problems for pension funds in the wake of the financial crisis.
He said the increased complexity meant that when the 'black swan' of the crisis arrived, funds were unsure how to react.
"During the crisis, we found that diversification of portfolios became a risk in itself," he said.
"In some cases, diversification led to an unwanted accumulation of risk."