Covid-19 has made anti-fragility the single most important concern for Europe’s pensions industry

With the global economy dogged by so much uncertainty, pension investors find themselves on a journey into the unknown and now prize portfolio resilience above all else, according to a new report published today by CREATE-Research and the largest European asset manager, Amundi.

The report surveyed 158 respondents from 17 pension markets across public and private sectors, collectively managing EUR1.96 trillion of assets. It aims to shed light on how pension plans worldwide are responding as the world economy struggles to recover from what is the economic equivalent of a massive cardiac arrest.
The extraordinary policy response by central banks and their governments was timely and vital. But it has also inflicted toxic side effects on pension solvency via ballooning liabilities and plunging incomes from zero-bound interest rates. Alongside the market meltdown in March 2020, these have ravaged funding ratios worldwide.
According to 85 per cent of respondents, financial markets will have a W- shaped or an accordion-shaped recovery: both are highly volatile by nature. Most respondents felt it was likely that central banks will lose their independence from their governments (84 per cent) and inflation will follow deflation after the current crisis is over (77 per cent). Finally, the overwhelming majority of those surveyed believe asset returns will be lower this decade than the previous ones (90 per cent).
Professor Amin Rajan of CREATE-Research, who led the project, said: “Assessing the macroeconomic damage of Covid-19 is akin to looking through a kaleidoscope: different images appear with each turn of the dial. However, one thing is certain: the longer the pandemic lasts, the greater the economic damage to Pension plans.”
Asset allocation will have two additional pillars: liquidity and resilience.
In this era of heightened uncertainty and volatility, investing has to be long haul, as highlighted by three quarters (76 per cent) of our respondents.
75 per cent of those surveyed will target private markets to achieve custom-built resilience, whereas high-quality cash flow compounders among global equities will top the asset allocation choice for 76 per cent of respondents looking to build anti-fragility into their portfolios.
Over half (58 per cent) will turn to thematic investing for inherent resilience via secular themes. One UK pension plan highlighted areas. The first being demographics: focusing on health care, and urbanisation. The second is technology: centred on artificial intelligence, 5G networks and cloud computing. The third is ESG: focusing on renewable energy, labour practices, and corporate governance.
Since sovereign bonds are expected to make minimal total returns, risk tools will rely overly on other means. Greater scenario planning will be the preferred approach used by plans to manage risk in portfolios over the next decade (61 per cent) whilst almost two thirds (57 per cent) will rely primarily on liquidity management. Diversification will remain a massive cornerstone in investing – be it based on asset classes (55 per cent) or risk factors (54 per cent).
Pascal Blanqué, Group Chief Investment Officer at Amundi, highlights: “Covid-19 has forced Governments and central banks to embark on a ‘whatever it takes’ wartime-type monetary response. The long-term impacts on financial markets only become evident in hindsight. Faced with such uncertainty, portfolio resilience and anti-fragility will be the new guiding star for pension investors.”
Five asset classes will be favoured for income: infrastructure (58 per cent), US Investment Grade bonds (44 per cent), Emerging Markets Investment Grade bonds (41 per cent), private debt (38 per cent) and European Investment Grade (36 per cent). Infrastructure in particular will benefit from large-scale fiscal stimulus with a special focus on renewable energy and its improving cost dynamics. One respondent added, “with its in-built resilience, infrastructure will be the biggest winner of this crisis.”
As for inflation protection, equities and infrastructure will be favoured again; commodities and real estate debt much less so with only 4 per cent and 29 per cent, respectively.
Sovereign bonds will be favoured by a small minority (18 per cent for US government bonds and 17 per cent for EM government bonds) and only those with good funding ratios that permit a high degree of portfolio de-risking.
The pandemic has given investors a real taste of how physical shocks can devastate portfolios. In this context, ESG investing has proved resilient while also targeting good risk-adjusted returns.
The market crash in March was a true test of whether or not ESG investing is just a bull market luxury, lacking resilience against big drawdowns. The findings of our survey show otherwise. For the majority of our respondents, their ESG funds performed better than the rest of the portfolio (52 per cent) or the same (45 per cent).
Furthermore, the long ignored middle child of ESG, the ‘S’ factor, has come into its own as Covid-19 has exposed low wages, precarious jobs and labour exploitation in frontline occupations – especially in the retail, transport and medical industries.
According to another survey participant, “firms are becoming aware that they need a social licence to operate. The old ways are now unacceptable to their customers.”
With these social considerations coming to the fore, the ‘S’ component in ESG will receive more prominence in the future as the spotlight is being turned on how global firms manage their supply chains in particular. Hence, the social factor (30 per cent) has now risen and the environmental (41 per cent) and governance (29 per cent) factors have fallen somewhat in relative importance since our 2018 Survey.

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