Blow to pension funds’ optimism

European pension funds say they have become more concerned about their own organisation’s ability to meet its financial objectives during the third quarter of 2010, with pessimist views outnumbering optimist views. Pension fund managers were also more negative about the economy’s prospects in their own countries than in the second quarter; the increase in pessimism about the funds’ financial prospects has been even more pronounced than the increase in pessimism about their own funds.

This is according to the most recent survey of pension funds in Europe, the Global Pension Survey (GPS) www.globalpensionsurvey.com. Every quarter, the survey questions pension fund managers about the developments they expect to see in the pensions sector and on financial markets. This quarter, the GPS included European pension fund managers and in the quarters to come it will be extended into a worldwide survey. The survey gives us not only an indication of the mood among pension fund managers but also of the economy in general. The GPS is the result of a partnership between Tilburg University, Investment & Pensions Europe (IPE) and the European Pension Academy (EPA), and has been conducted for the third consecutive quarter.

The optimism index measures the difference between the percentage of those who are optimistic and those who are pessimistic, and indicates the change in optimism among pension funds. A positive (negative) percentage indicates more (less) optimistic than negative responses.

Nursing cover ratio back to health is priority

There is widespread concern among the managers questioned in the Global Survey about the continuing turmoil in the financial markets, and how its affects their pension funds. In total, 60% of the surveyed pension funds identify interest rate movements as the most important external challenge, with investors pushing bond yields down to the lowest levels in the past two years, lowering cover ratio’s again after a rebound in 2009. Other major external challenges are stability of the financial system (56%, compared to 44% in the second quarter) and continued volatility of the financial markets. Inflation as a major theme has moved to the background, identified by 18% as a major concern compared to 36% in the last quarter.

These external concerns spill over to the pension funds’ own organisation and focus the internal agenda. Maintaining financial health has become the key concern – more than 70% of the funds are concerned about their fund’s cover ratio, compared to 62% last quarter. Pension funds say they assess other internal concerns (effective risk management and ability to focus on long term investing) on a similar level as last quarter. In these uncertain markets, the GPS results also seem to suggest that pension funds shun clear choices in portfolio construction, rather placing their faith in a wide range of strategic options without a clear winner. Compared to previous quarters, major investment themes like investing in emerging markets, combining active as well as passive management, and expanding alternative investments are all choices that funds consider for the coming three years.

The answer to the question: what are the most internal and external challenges facing your pension funds in the next twelve months?

Pension funds stand firm on euro

Pension funds say they are not reassured that recovery of economic growth and financial stability in the eurozone is in sight, but refrain from a negative stance on the euro’s prospects. A comfortable majority of the respondents (60%) agree with the statement that the emergency lending measures announced by the European leaders and central banks will positively affect the European economy. Asked whether the financial stability in Europe is severely threatened by Greece, Spain or Italy, 71% of the surveyed pension fund managers and trustees agree. 69% acknowledge that if the financial situation in the Mediterranean countries will worsen in the coming months, it will have a further negative impact on their pension funds’ performance.

The euro still enjoys has a strong supporter base. Despite the financial turmoil, respondents tend to focus on the positive effects of the euro on the European economy. 69% agrees that the Euro has brought more prosperity economically, yet only 44% of the funds agree that the introduction of the euro overall had a positive effect on their pension funds’ performance.  Stability seems to be the way forward. Reassuringly for the Grecians, only 22% agrees that Greece should be excluded from the euro.

About Kees Koedijk

Kees Koedijk is Professor of Financial Management and Dean of the Tilburg School of Economics and Management at Tilburg University. Kees Koedijk was the chairman of the Raad van Economisch Adviseurs (REA), an important council of economic advisors to the Dutch Parliament. In the past, Koedijk has won several awards for his research on sustainable development. He has published extensively on finance, responsible investment, and pension management. During the last 10 years he served at several investment committees of pension funds.
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