Earlier this year Ortec Finance commissioned Pureprofile to find out the views of pension fund managers with regards to World Bank’s warning about the risks of stagflation. 201 pension fund managers in the US, UK, Australia, Canada, the Netherlands, Switzerland, Denmark, Finland, Norway, and Sweden were interviewed using an online methodology. The full research report is now made available.

Earlier this year The World Bank warned about the risks of stagflation and its “potentially harmful consequences for middle- and low-income economies alike” as it cut its global economic growth forecast to 2.9% for this year, compared with its previous forecast of 4.1% for 2022. World Bank President David Malpass believes that: “For many countries, recession will be hard to avoid.”

Pension funds under stress?

The World Bank is one voice among many warning of the deteriorating macroeconomic picture worldwide triggered by a range of issues including the fallout from the pandemic, the Russian invasion of Ukraine, rising energy prices, rising inflation, and rising interest rates. In addition, pension fund managers are having to cope with market volatility while searching for yield and the need to address climate change risks now and in the future. The range of challenges adds to the uncertainty and makes risk management more challenging.

The pension fund managers interviewed are collectively responsible for $1.946 trillion assets under management, so their views are based on real life experience of running major funds. The study focused on issues including:

  • What they are doing about stress testing and scenario modelling
  • How they see the longer-term risk of climate change compared with the immediate risks of inflation and potentially stagflation
  • How are they coping with investment complexity and what tools do they need and want?

Research outcomes

Climate change risks are currently dominating the agenda for pension funds having a major impact on scenario modelling and stress testing while also making the search for yield more complicated. The research shows how confident pension fund managers are about the impact of inflation on pension schemes over the next year, particularly as so many predict that inflation will continue its dramatic rise.

Many schemes have already reallocated to certain asset classes in order to help inflation-proof their portfolio, and more are looking to do so in the next 12 months, as they predict future turbulence and inflation increases in the next 12 months. By modelling and mapping ahead, schemes are able to weather the storm, and overcome any short-term risks while still achieving their long-term objectives.

Pension fund managers have real concerns about stagflation and looking at their predictions for when regions will enter a recession, these are not only justified, but could become real very soon.

As we experience significant volatility in the markets and with major economic events predicted in the not-too-distant future, pension funds need to keep one step ahead and manage allocations carefully to minimise the impact that inflation and even a period of stagflation could have. Carrying out detailed mapping and modelling can help pension fund managers to navigate these uncertainties to achieve their long-term objectives while dealing with short-term risks.

Stress testing and scenario modeling seems clearly vital for pension funds and there is widespread recognition that the industry as a whole and funds themselves have to spend more to meet their goals. It is interesting to see that the main reason spending will rise is because funds have had to widen the range of assets, they invest in so that they can deliver the yield required to meet their obligations. Technology is however available which can help pension funds balance the demands of rising investment complexity while implementing strategies to address the issue.

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