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.

1. ASK THE EXPERTS
Quarter 2 - 2013
Q: What does the future pensions environment
look like?

2. ASK THE EXPERTS
Quarter 2 - 2013
Nick: I’m not very keen on making predictions but I will try and give some sort of view on
where we are today and what might happen. We have seen quite a substantial move in
risk assets, over the last few month up until the end of March (2013) with equities and
credit doing pretty well. That could be seen as an indicator that the economic and market
environment has begun to turn for the better and materially so I think there are some
genuine signs of improvement. The US economy seems to be recovering quite solidly, the
risks of a big slowdown in China appear to be past, and whilst the Eurozone is still
trundling along at a very low level of growth there have been words spoken and actions
taken in terms of ‘doing what it takes’ to maintain stability there.

3. ASK THE EXPERTS
Quarter 2 - 2013
But I think if you want to be a bit more cautious one would say that the upward move in
markets isn’t really indicative of a materially better economic environment. I think its partly
a function of the very low returns available on low risk assets such as cash and bonds, it’s
also a function of liquidity that has come in to the system through quantitative easing and
other stimulatory policies, and to be honest it’s a bit of boredom by the markets. They
have been worrying about the same issues for so long they have got a bored. They have
said we know all about the Euro issues, we can’t go on exciting ourselves about them, so
let’s buy equities anyway and see what happens. That’s a bit crude perhaps but there is
an element whereby market sentiment has changed for the better without any real
underlying reason, I don’t think.

4. ASK THE EXPERTS
Quarter 2 - 2013
The 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 them
for now. Maybe the future has improved a little bit but I don’t think we are through this
particular part of the cycle and on to the “sunny uplands” of steady and recovering growth
or above trend growth. We remain reliant on monetary stimulus and I do think the risks of
set-backs are also still meaningful.

5. ASK THE EXPERTS
Quarter 2 - 2013
Matthew: Nick has rightly focussed on economic and market issues. Perhaps I will take
a slightly different slant on this and I will answer as regards the future for pension funds
themselves. If we go back a few years, some funds really got to grips with defining their
objectives and risk appetite prior to the credit crunch. Now, not many but a number of
funds have done that, and those funds who did have been able to come through the
past few years relatively unscathed.
So a lesson I guess I take from that is whatever the future holds it includes considerable
uncertainty. Those funds that have clear aims, and a detailed journey plan and that have
a balanced approach to covenant, funding and investment, I think, are most likely to stay
on track whatever the future brings.

6. ASK THE EXPERTS
Quarter 2 - 2013
Jelle: I agree with both sentiments that Nick and Matthew voiced, and in the
Netherlands certainly there is also an awareness that sentiment might have changed but
the fundamentals haven’t really. An interesting development is the increasing
political/public pressure for pension funds to use their assets to help the Dutch economy
and very recently there has been an initiative to create a national investments vehicle
that would issue state guarantees for residential mortgage backed securities. The idea
being that pension funds should invest in them and in that way kick start the Dutch
housing market back in to action. I expect a lot of firms to really consider that
opportunity driven by the public pressure or because the extra investment pick-up might
be interesting for a state guaranteed security. They might consider it as a substitute for
(Dutch) government bonds.

7. ASK THE EXPERTS
Quarter 2 - 2013
Another development is the new draft pension agreement, a process going on for years
now - and has recently been postponed again. Once the agreement becomes law, there
will be two flavours of pension frameworks. One with hard nominal liabilities - a bit like
the present framework, but, with harder risk management and stronger risk and buffer
requirements. The other will be more like the UK with real liabilities, with inflation
indexation but where the investment risk would be taken by the participants rather than
the corporate and participants together. It is expected that pension funds that choose
the latter variant will change their asset mix and will take more risk in order to achieve
the investment returns that can meet their real ambitions.

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