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Pension Funds

Political risks among challenges facing pension funds – PLSA conference

Political risks and headwinds remain high on the list of concerns for U.K. pension funds, delegates heard at the Pensions and Lifetime Savings Association's annual conference in Edinburgh on Wednesday.

Speakers agreed that political leaders globally have not dealt with issues such as demographics and distribution of capital. Daniel Booth, chief investment officer of Border to Coast Pensions Partnership, Leeds, England, a 46 billion ($60.7 billion) pool of 12 U.K. local authority pension funds, said that because there is no leadership on these issues there is "no reason to find a solution to these tensions."Mr. Booth said the retirement age in the U.K. would theoretically need to be increased to at least 70 by 2030 to meet a stable support ratio of active workers to retirees.

Speaking on the same panel, Roelof Salomons, chief strategist at Kempen Capital Management, added that center-right and center-left governments have been losing popularity in developed market countries since 2008. But he said that an increase in inflation would "help to release debt burden and alleviate some of the issues regarding populist governments."

Jo Holden, CIO for Mercer's U.K. advisory business, said on the same panel that among other challenges, "we are probably facing a bear market at some point," but Ms. Holden said she was "worried investors were not taking any action on risk management as they (still) think yields will increase."

Ms. Holden said although investors had similar expectations for yields in 2010, 2011 and 2012, defined benefit funds are more mature than 10 years ago. Pension funds should take a step back and assess how much upside do they really need in a shorter time horizon of 10 to 15 years, she said.

"Discount rates (which are gilt-related) are very low, and pension funds don't need a huge amount of return," Ms. Holden said.

However, Mr. Booth added, depending on the pension fund's liability structure, diversification is about how much risk a pension fund should employ, not adding more managers or asset classes. "It's understanding what the risk drivers are," Mr. Booth said. "Adding more asset classes dilutes the alpha."