From the blog: Market liquidity is reducing. It's been an issue for a while, and it is only going to intensify. As such, it holds serious ramifications for investors globally.
The bread and butter asset class for a pension fund’s core portfolio holding is often fixed income.
But low interest rates have led to a notable search for fixed income yield, and so have heightened competition in this asset class.
The bread and butter asset class for a pension fund’s core portfolio holding is often fixed income. But low interest rates have led to a notable search for fixed income yield, and so have heightened competition in this asset class.
One of the starkest warnings came from the International Monetary Fund last year, when it said: “The solvency of many life insurance companies and pension funds is threatened by a prolonged period of low interest rates.”
Our research found more than a third (37 percent) of global pension funds said they feel current market liquidity conditions are having a significant impact on their investment management strategies.
Schemes need to understand liquidity
In terms of liquidity risk, the good news is that many pension funds say they currently feel confident about managing it effectively. More than half (59 percent) of global pension funds said they are ‘very confident’ in their ability to maintain adequate levels of liquidity to support business operations.
However, the concern is that, as market conditions intensify and pressure in the fixed income asset class deepens, this ability will continue to be tested.
So, the focus needs to sharpen. All market participants, including pension schemes, need to gain a greater understanding of liquidity across markets and asset classes, particularly during periods of stress.
Equally, there is a need to see what happens to redemption patterns under normal and stressed conditions as well.
This is particularly pertinent to the UK’s pooling initiative for the Local Government Pension Scheme, where 89 participating funds are consolidating assets into eight asset pools.
As these funds reshape to adapt to their new size and structure, they have the opportunity to overhaul outdated legacy systems, revisit asset allocation and asset-liability management, and benefit from new economies of scale.
Andy Todd is head of UK pensions and banks, asset owner solutions, at State Street
