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Global Future of Retirement

Few bright spots beckoning on the investment horizon

Speakers see many challenges currently facing pension execs

Michael K. Lillard was pessimistic, seeing anemic growth for an extended period of time.

The seeming consensus that emerged from Pensions & Investments' latest conference on the Global Future of Retirement was fairly bleak for pension executives: the trend — when it comes to capital markets and economic growth globally — isn't your friend.

A cautionary tone about the short- to medium-term outlook as well as the long term dominated the conference in New York on June 26-27.

A global economy that generates only "low-yield, low-rate-of-return investment opportunities" is leaving investors under pressure to add risk ahead of a likely economic downturn in coming years, said Arthur R. Kroeber, Hong Kong-based editor and head of research with Gavekal, a China-focused research firm, speaking on the conference's opening panel.

And a number of conference speakers predicted the challenges facing pension fund executives in securing the returns needed to provide beneficiaries with a comfortable standard of living in retirement could prove more permanent than cyclical.

"Demographics, high debt loads, low productivity" all point to lackluster growth for a ​ long period of time, said Michael K. Lillard, Newark, N.J.-based head and chief investment officer of PGIM Fixed Income, on the conference's opening panel.

That tepid outlook might be more than just a hangover from central bank policies, which have left "tons and tons of cash chasing income," he said, predicting investors struggling now with global growth in the 3% range are going to have to "get used to 2%."

Global growth is "heading toward a range of below 3%," agreed economist and author Marc Levinson, in a keynote address at the close of the conference's first day.

Productivity growth, the only real answer to the problem, is more a matter of demographics and moving segments of a country's workforce from less productive areas, like farming, to more productive employment, like manufacturing, said Mr. Levinson. For the most part, governments — after reaping low-hanging fruit such as investing in national road networks — simply lack policy options for sustaining strong productivity gains, he said.

If the global outlook offers slim pickings for retirement plans, the landscape isn't entirely bereft of opportunities, speakers said. High-quality commercial mortgage-backed securities, AAA-rated collateralized loan obligations and the bonds of money-center banks all offer potentially attractive returns now, noted PGIM's Mr. Lillard. Still, those investments amount to "singles" in the game of investing. "We don't see home runs" on the horizon, he said.

Better times ahead?

At least one speaker saw reasons to hope for better times ahead in the face of formidable headwinds for the global economy.

In a discussion on the risks and opportunities for investors from long-term global trends, Vikram Mansharamani, the Yale University lecturer and author of "Boombustology," conceded a structural excess of supply vis-a-vis global demand — due to factors such as the slowdown of China's economy and the impact of new technologies — is undermining globalization and fueling populism. But Mr. Mansharamani said a "demand shock" from the rapid growth of the middle class in India and Africa — "the fastest growing regions in the world today" — could help restore needed balance to global demand and supply. Population growth may be stagnant pretty much everywhere else, but the middle class is "about to explode" in India and Africa, he said.

Mr. Levinson said he wouldn't go that far. Shifting "underemployed" segments of India, Pakistan and Africa's growing populations to more productive employment could lead to decades-long booms for those economies, but "I suspect they're not big enough as a share of the world economy to really move the needle," he said.

As the conference drew to a close, Sanford Rich, who served for three years as chief of negotiations and restructuring for the U.S. Pension Benefit Guaranty Corp. before becoming executive director of the New York City Board of Education Retirement System in early 2016, said there are reasons to be concerned about the health of a broad swath of defined benefit plans in the U.S.

Mr. Rich cited multiemployer plans as facing especially tough challenges, predicting that close to 8% could default on their obligations over the coming decade, but he said corporate and public defined benefit plans in the U.S. will be facing losses as well. Good governance could prove to be the difference between the winners and the losers, he said.

What little could be heard at the conference in the way of non-discouraging words centered on potential innovations in the way pension money is managed. On that score, the "Canadian model" spearheaded by that country's big pension plans in recent decades, with a focus on insourcing and long-term wealth creation, was held up as a potential answer to many of the challenges retirement plans globally are facing now.

In the conference's opening session, Ashby Monk, research director of the Stanford Global Projects Center, said big institutional investors are coming to him now asking how they can innovate — a shift to how they should invest rather than what they should be investing in.

In a separate panel discussion, Keith Ambachtsheer, president of pension industry advisory firm KPA Advisory Services and director emeritus of the University of Toronto's Rotman International Centre for Pension Management, said the Canadian model's focus on long-term investments offers the potential for yields and returns exceeding the shorter-term investments most retirement programs build their portfolios around.

He cited the proactive role played by C$270.7 billion ($203.9 billion) Caisse de Depot et Placement du Quebec, Montreal, over the past two years in planning and facilitating major projects to upgrade Montreal's transportation system as a harbinger of things to come.

In an interview on the sidelines of the conference, Mr. Ambachtsheer predicted the Canadian model's reliance on building extensive internal investment capabilities, replete with networks of overseas offices, and the hiring of top flight investment talent will favor asset owners with the scale needed to make those investments.

In that sense, it will likely prove harder to replicate than the endowment model, which has been widely followed in the decades since universities such as Yale and Harvard diversified into hedge funds and private markets.

Stanford's Mr. Monk said the next phase of innovation could prove challenging in the U.S., where big pension funds have focused on being efficient, "keeping salaries to pension funds down, keeping internal organizational costs low."

That kind of cost consciousness is antithetical to the "way to innovation, (which) demands failures, waste, allocating capital to projects for which you don't know the answer," he said.