Pension funds fear that many economies will only manage to cope with disappointing and stuttering post-crisis recoveries and that inflation will rise due to massive emergency monetary measures introduced by central banks to stabilize financial markets, according to the ‘study.
“Pension funds are really worried. Covid-19 has ravaged the funding ratios of pension systems across the world, ”said Amin Rajan, chief executive of Create Research, the consulting firm that surveyed 158 pension plans in 17 countries that together manage 2 billion euros.
Nine in ten of the pension funds have warned that they expect investment returns to be lower in the current decade compared to the latest and three-quarters of expected inflation.
“The only way to reduce the mountain of global debt is to inflate it,” said one US pension fund executive, who declined to be named.
Governments and central banks have been forced to work in tandem to provide assistance to businesses and households affected by the pandemic.
More than 80% of pension funds surveyed by Create said they expected the power of central banks to boost asset prices to weaken. Instead, governments would assert more control over monetary policy, they said.
“We may well be witnessing the reversal of a long process which has led to investment returns being influenced much more by central bank actions than by the state of the real economy,” said Pascal Blanqué, director of investments of Amundi, the French assets of 1.6 billion euros. manager who sponsored the research.
Uncertainties resulting from the coronavirus have reinforced the focus of pension funds on building greater resilience to future crises and preparing their portfolios for a range of post-pandemic scenarios, Rajan said.
“The pandemic has made it clear how physical shocks can shake markets and rattle pensions in ways that were previously unimaginable,” he said.
Cuts in dividend payments and interest rates during this year have further weakened the funding position of defined benefit pension plans, which pay out guaranteed income in retirement.
One-third of the DB plans studied expect to have to cut retirement benefits because of their low funding. Just under half said they would need their plan sponsor to make additional financial contributions even as cash flow declined for many businesses and organizations during the pandemic.
“The hard truth is that the DB Promise was easy to make but difficult to keep in an era of low interest rates. Plan sponsors can only slowly reduce retirement benefits to contain their burgeoning obligations, ”said Rajan.