The coronavirus outbreak has had a major impact on financial markets. The FED has cut the interest rate by 0.5%, the German 10-year government interest rate has fallen to -0.6%, the Swiss 10-year rate approached again -1.0% and stock prices have fallen by around 10% since the outbreak of the coronavirus in Wuhan. The funding ratios of pension funds worldwide suffered a considerable decline.

Which actions can and should be taken?

In general, before all kinds of perhaps hasty decisions are made, we recommend performing a risk analysis. A pension fund should ask itself what the possible scenarios are and what the consequences of these scenarios might be. Especially in the current situation we find ourselves in, it is important to not only review the financial, but also, the operational risks.

Financial consequences

To identify financial risks, pension funds and other institutional investors will need to assess the possible consequences for important economic variables such as growth, inflation, interest rates, returns and volatility. By creating a number of different paths for the future, regarding the development of the coronavirus, it is possible to outline what the possible consequences would be. This can range from a controlled outbreak of the coronavirus to a global pandemic. The process of identifying possible future paths, offers opportunities to discuss whether additional control measures must be taken, and what the effectiveness of these control measures are.

Depending on the investment beliefs, it can be decided whether an adjustment of the portfolio is desirable. A pension fund with a long-term vision will be less inclined to make structural adjustments to the portfolio. A well-diversified portfolio of instruments, sectors and countries is already a way of mitigating at least part of the impact. At present, the general consensus is that the impact of the corona outbreak is still limited to a number of regions, and that there is not yet a pandemic. This means there is no immediate reason to believe that this will trigger a worldwide long-term recession.

Within actively managed portfolios based on short-term vision, the coronavirus can have more impact on the composition of the portfolio. Usually this falls within the mandate of the active managers. Given the great uncertainty around the development of the coronavirus going forward, applying tactical policy, based on recent market developments, is not obvious.

Some pension funds will have breached the critical funding ratio levels due to the recent market developments. Assuming a crisis plan is available, this comes into effect for these pension funds. For pension funds without a predefined crisis plan and the desire to create one, we are happy to assist.

Operational consequences

In addition to the financial risks, pension funds must also consider the possible operational risks. What are the possible consequences of a larger worldwide corona outbreak on the ongoing processes? Can the pension payments continue to be made? Can investment transactions be executed? Can employees work from home and can board members attend board meetings? What measures have been taken by external companies like the asset manager, the fiduciary manager and the administrator? Has the pension fund drafted a policy to guarantee continuity of processes?

If you would you like more information about the possible measures you can take, around the outbreak of the coronavirus, feel free to contact your contact person at Ortec Finance.

 

Contact

Marnix Engels
Managing Director Pension Strategy
+31 10 700 56 03
Loranne van Lieshout
Loranne  van Lieshout
Teamleader Investment Consulting & Risk Management
+31 6 13 13 17 85