Ask The Experts - Quater 2, 2013 - Part 4


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In this quarter’s Ask The Experts, we feature Mercer Investment experts Nick Sykes, Matthew Demwell, and Jelle Beenen.

Fiona Webster asked our experts for their perspectives on issues raised at Mercer’s UK Investments Roadshows, held in January and February.

Published in: Economy & Finance, Business
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Ask The Experts - Quater 2, 2013 - Part 4

  1. 1. ASK THE EXPERTSQuarter 2 - 2013Q: What does the future pensions environmentlook like?
  2. 2. ASK THE EXPERTSQuarter 2 - 2013Nick: I’m not very keen on making predictions but I will try and give some sort of view onwhere we are today and what might happen. We have seen quite a substantial move inrisk assets, over the last few month up until the end of March (2013) with equities andcredit doing pretty well. That could be seen as an indicator that the economic and marketenvironment has begun to turn for the better and materially so I think there are somegenuine signs of improvement. The US economy seems to be recovering quite solidly, therisks of a big slowdown in China appear to be past, and whilst the Eurozone is stilltrundling along at a very low level of growth there have been words spoken and actionstaken in terms of ‘doing what it takes’ to maintain stability there.
  3. 3. ASK THE EXPERTSQuarter 2 - 2013But I think if you want to be a bit more cautious one would say that the upward move inmarkets isn’t really indicative of a materially better economic environment. I think its partlya function of the very low returns available on low risk assets such as cash and bonds, it’salso a function of liquidity that has come in to the system through quantitative easing andother stimulatory policies, and to be honest it’s a bit of boredom by the markets. Theyhave been worrying about the same issues for so long they have got a bored. They havesaid we know all about the Euro issues, we can’t go on exciting ourselves about them, solet’s buy equities anyway and see what happens. That’s a bit crude perhaps but there isan element whereby market sentiment has changed for the better without any realunderlying reason, I don’t think.
  4. 4. ASK THE EXPERTSQuarter 2 - 2013The long term problems of de-leveraging of the system, Euro instability, US fiscal issues,haven’t been solved at all, they are still out there, but the markets are just ignoring themfor now. Maybe the future has improved a little bit but I don’t think we are through thisparticular part of the cycle and on to the “sunny uplands” of steady and recovering growthor above trend growth. We remain reliant on monetary stimulus and I do think the risks ofset-backs are also still meaningful.
  5. 5. ASK THE EXPERTSQuarter 2 - 2013Matthew: Nick has rightly focussed on economic and market issues. Perhaps I will takea slightly different slant on this and I will answer as regards the future for pension fundsthemselves. If we go back a few years, some funds really got to grips with defining theirobjectives and risk appetite prior to the credit crunch. Now, not many but a number offunds have done that, and those funds who did have been able to come through thepast few years relatively unscathed.So a lesson I guess I take from that is whatever the future holds it includes considerableuncertainty. Those funds that have clear aims, and a detailed journey plan and that havea balanced approach to covenant, funding and investment, I think, are most likely to stayon track whatever the future brings.
  6. 6. ASK THE EXPERTSQuarter 2 - 2013Jelle: I agree with both sentiments that Nick and Matthew voiced, and in theNetherlands certainly there is also an awareness that sentiment might have changed butthe fundamentals haven’t really. An interesting development is the increasingpolitical/public pressure for pension funds to use their assets to help the Dutch economyand very recently there has been an initiative to create a national investments vehiclethat would issue state guarantees for residential mortgage backed securities. The ideabeing that pension funds should invest in them and in that way kick start the Dutchhousing market back in to action. I expect a lot of firms to really consider thatopportunity driven by the public pressure or because the extra investment pick-up mightbe interesting for a state guaranteed security. They might consider it as a substitute for(Dutch) government bonds.
  7. 7. ASK THE EXPERTSQuarter 2 - 2013Another development is the new draft pension agreement, a process going on for yearsnow - and has recently been postponed again. Once the agreement becomes law, therewill be two flavours of pension frameworks. One with hard nominal liabilities - a bit likethe present framework, but, with harder risk management and stronger risk and bufferrequirements. The other will be more like the UK with real liabilities, with inflationindexation but where the investment risk would be taken by the participants rather thanthe corporate and participants together. It is expected that pension funds that choosethe latter variant will change their asset mix and will take more risk in order to achievethe investment returns that can meet their real ambitions.
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