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Ahead of the marcus evans European Pensions & Investments Summit 2019, 
Baroness Ros Altmann discusses why the cost of pensions has increased significantly 
and how pension funds are dealing with some of the challenges they are facing today 

Copyright © 2018 Marcus Evans. All rights reserved.

20 - 22 May 2019

Fairmont Le Montreux Palace, Montreux, Switzerland

“In the last decade, monetary policy has posed a huge new challenge to pension funds,” according to Baroness Ros Altmann, Former UK Minister of Pensions. “The reduction in long-term interest rates has significantly increased the cost of providing pensions, resulting in rising deficits. Thus many pension funds needed to outperform liabilities not match them,” she adds.

Baroness Altmann is a keynote speaker at the marcus evans European Pensions & Investments Summit 2019, taking place in Montreux, Switzerland, 20 - 22 May.

Describe the current investment landscape for pension funds, and what they need to know. 

Central bank policies and quantitative easing (QE) have had many unintended and unrecognised consequences. These effects may be partly responsible for the rise of populism, discontent with established parties, Brexit, and Donald Trump’s election.

QE has artificially inflated asset prices and widened wealth inequalities. Monetary policy has distorted investment and interest rate risk to the point where the supposedly risk-free rate may not be risk-free. QE also had a significant impact on long-term liabilities. Liabilities have increased more quickly than assets, so trustees dealing with rising deficits are under pressure to de-risk, but that also reduces expected returns. It is a negative cycle.

Managing risk and return is the new big challenge for pension funds. We do not know how risky the risk-free asset (i.e. government bonds) actually is, and we will not know for many more years.

What investment strategies would you propose in such uncertain times? 

Rather than chasing government bonds, they may be better advised to diversify more and use derivatives to protect downside. Traditional asset allocation models and measures of risk are based on an asset that may no longer be risk-free. So one way to manage risk is to diversify, look for different types of investment return. Many asset managers are switching to infrastructure, which can provide an inflation-linked return that is better than index-linked government bonds. If they invest in the early stages it will be even better. Pension funds are also diversifying into social housing and build-to-rent.

What will happen next? Where does that leave pension funds? 

After this emergency monetary experiment, we do not quite know when, how and whether central banks will unwind the policy. That has always been their intention, which effectively means they will need to sell massive amounts of sovereign debt back into the market. But who will buy all that debt?

The policy had enormous consequences for pension investors, but I believe there are additional consequences we do not know about. Will there be another crisis and if so would there be another round of QE?

It is also possible that we will see a major shake-out in both the bond and equity markets for a while, as investors are fearful of the volume of debt that needs to be sold.

The markets will become very fragile if central banks do unwind their holdings. Perhaps central banks will collude with each other, and possibly with governments and investment firms, to allow holdings to mature without capital being repaid. That would lower interest rates even more when many in the pensions world are waiting for them to rise.

QE has had significant unintended and unexpected consequences, not just for pension funds. Wealth inequality has increased. Those who already owned assets have benefited from QE, but it has damaged those who do not own a home or who save in cash. QE has been like a tax cut for the wealthiest.

Dissatisfaction about rising inequality may partly explain the Brexit vote and the rise of populism. The damaging side-effects of QE mean, in my view, central banks must find alternative ways to boost the economy.