Pension industry in danger of “permanent damage”, as risks are transferred to individuals according to a new survey by Amundi and Create Research
Pension plans are concerned about the increasing personalisation of risk in the industry, and warn it could cause “permanent damage”, according to a report published today by CREATE-Research and Amundi. The research questioned 184 pension plans in Europe with combined assets of €1.8 trillion, revealing for the first time the impact of Quantitative Easing (QE) on the pension plans themselves.
The positive effects of QE are not contested, not least the role it played in preventing a rout turning into a 1929-style depression after the collapse of Lehman Brothers in 2008. However, as long-term investors, pension plans have articulated their vulnerability to financial repression – the transfer of wealth from savers to borrowers. Of the pension plans surveyed:, 65% believe that QE has acted as an opaque tax on investors, while 64% believe that QE has forced an artificial convergence in the asset allocation of pension plans – with fear over relative under-performance inducing pension plans to herd around average returns.
Ultra-low yields have forced investors into riskier assets that they would not normally choose; giving rise to “crowded” trades, correlated mistakes, stretched valuations and price insensitivity. But unwinding QE will not be easy, with central bank action causing markets to move in ways one cannot predict. The longer the QE lasts, the more difficult it is to predict the risk-returns features of different asset classes, their inter-correlations and their diversification potential. Key elements of prudent pension investing are reduced to guesswork, and the notion of a “risk-free” rate is now a misnomer.
Professor Amin Rajan of CREATE-Research, who led the project, said: “Governments in developed and developing economies are relying on ultra-low rates to make their debt more manageable and rising inflation to vaporise it. Quantitative easing is forcing investors to move up the risk curve. while retirees are increasingly obliged to bear the brunt of all risks themselves. Pension Plans are rightly worried about the implications of this shift in responsibility.”
As employers move away from final salary ‘defined benefit’ (DB) schemes in favour of defined contribution (DC) and Governments look to reduce the cost of long-term retirement benefits and, the risk has transferred to employees – the so called personalisation of risk, which is creating a sense of insecurity that has not been felt by previous generations of retirees.
According to two thirds of pension plans (66%), treating an employee as a “financial planner” could permanently damage the pension industry. Moreover, 71% of respondents believe that DC plan members lack the necessary investment expertise. In other words, risk has been transferred from those who were unable to manage it to those who are ill-equipped to manage it.
Pascal Blanqué, Chief Investment Officer of Amundi, said: “This report aims to explore how financial repression has affected Europe’s pension fund managers. While the full effects of quantitative easing remain unknown, in responding to this period of austerity, low inflation and subdued growth outlook , pension funds must not only adapt their investment strategies, but also engage with plan members to raise awareness and asset managers and policy makers have a role to play.”