UK - Pension funds have left their investment portfolios exposed to a number of "very painful" and "quite likely" economic scenarios, Cardano has warned.
The fiduciary manager said most pension UK schemes focused on the "most likely scenario" when setting out their investment strategies - at the expense of considering extreme risks.
It said, for instance, that most schemes took the common view that economic growth would return, and inflation would remain under control.
The idea that equity and corporate bond markets will produce decent long-term returns is another common fallacy, it said.
While Cardano concedes there is a 55% chance of this 'new normal' scenario playing out in the UK, it warned that most schemes have neglected the possibility of a double-dip recession, which it places at about 25%, or an inflationary environment, which it places at about 20%.
Keith Guthrie, chief investment officer, said fears over low economic growth or inflation were balancing on a knife edge.
"The significant debt problems of a number of countries, most notably in Europe, combined with severe government spending cuts and quantitative easing, make for a dangerous concoction," he said.
"However, at the moment very few pension funds are thinking about 'all weather' investment strategies. It is important pension funds have a balanced portfolio and invest something in assets expected to perform well if these 'tail risks' occur.
"This might include the use of derivatives to provide protection against markets falling or inflation rising, or specific assets or funds expected to do well in tail risk scenarios."