Ortec Finance: One in five pension funds lack adverse scenario liquidity

Ortec Finance: One in five pension funds lack adverse scenario liquidity

14 januari 2025

Pensioenfondsen
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Over the last decade, pension funds have increased their investments in private assets to boost returns through the illiquidity premium, but now funds are reflecting on their potential liquidity risks. Nearly one in five (18%) pension funds say they do not have enough liquidity to withstand adverse scenarios, according to a new global survey from Ortec Finance.

The study in the UK, US, the Netherlands, Canada and the Nordics with senior pension fund executives whose funds collectively manage $1.451 trillion in assets found on top of this 18%, a further 62% believe they have enough liquidity for most scenarios but admit the situation could become problematic in extreme scenarios. Just 20% say they have no liquidity concerns.

Managers see risks across the short and long term, with long-term liquidity risk being the larger concern for the pension plan managers questioned. Around 60% say it is the biggest risk faced by the funds they manage, while 25% say short-term liquidity is the biggest risk. Only 15% say the short and long-term risks are roughly equal.

Increasing exposure to private assets is part of the reason for liquidity concerns, particularly among defined benefit (DB) schemes. Of the managers questioned, 80% reported that the risk of unfunded commitment pose a significant or slight risk to the DB pensions industry over the next three years. Overall, a quarter (25%) of the managers believe unfunded commitments beyond the control of pension portfolio managers pose a significant risk, while 19% say it is not a risk.

Despite the presence of these liquidity concerns, more than half (58%) say liquidity is already well-managed and 28% say other risks are more pressing. Just one in 10 (10%) say liquidity risk is front of mind, while 4% say it is not a major concern.

Marnix Engels, Managing Director Global Pension Risk at Ortec Finance said: “Our study highlights the liquidity issue that pension funds are facing, especially given the largely unpredictable nature of projecting unfunded commitment and capital calls. “To address this issue thoroughly, funds should focus on scenario modeling and stress testing. Scenario modeling of the capital calls and distributions or private assets can help funds understand what their liquidity constraints may be in the worst-case scenarios in the next five, 10, or 20 years.”

The survey was conducted during November 2024, by independent research company PureProfile.

 

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