Improved market conditions offer pension funds an opportunity to lower risks, according to U.K. data from Mercer.
The global financial crisis has introduced new realities and challenges for institutional investors to consider while planning strategies for 2011 and beyond. The study says recent market conditions have been good and the ‘financial health’ of many investors will have improved significantly in recent months.
Pension funds’ investment returns have averaged about 12.5% in the 12 months to end-January 2011, while liability values have generally declined due to rising bond yields, the Mercer data show. The combination of these factors provides an opportunity for many plans to consider de-risking their investment strategy.
However, the scale of the challenge should not be underestimated. Despite the recent recovery in markets, pension funds have lost money over the last three years, down 2% per annum.
“Although economic and financial confidence is tentatively returning to some Western countries, the crisis has wreaked havoc on a number of nations’ balance sheets and disrupted the credit allocation process in Western economies, and added to the potential for global tensions,” said Brian Griffin, head of Mercer’s investment consulting business in Ireland.
Accordingly, investors and pension funds face a number of new realities in 2011, including the need to revisit the approach to bond investing. Growth in major developing economies such as China and India raises questions about a two-speed world for investment. Finally, inflation is a growing concern longer-term with regards to whether current investment portfolios are adequately protected.
“Investors should start to focus more attention on the longer-term fallout and implications from the crisis and consider how to reflect this in their portfolios, says Griffin. “Some of the outcomes have greater visibility, others less.”
This means ensuring that those managing investment portfolios retain the flexibility to respond to developments and seek to ‘win by not losing,’ he says. “The new realities of the investment environment will create many opportunities, but that they also call for fresh thinking, the ability to make quick decisions, and resilience in the face of a distinct lack of certainty.”