(Bloomberg Markets) -- What may have once been unthinkable is now the new normal. We live in a world of negative interest rates. For pension funds, which safeguard the financial security of tomorrow’s retirees, this means the future is unclear at best. “We are in uncharted territory,” says Innes McKeand, head of equities at AustralianSuper Pty, the largest pension fund in Australia. “Those of us who have been around a long time are struggling to get our heads around giving money to a European government, and they will give you a negative return for 30 years.” What are the other options—go big on private equity? Explore riskier markets? Or should you simply readjust your expectations for returns? Bloomberg Markets spoke with those currently struggling with this conundrum about their subzero strategies.
Ben Meng
Chief investment officer at California Public Employees’ Retirement System
“We should carefully study the experience of Japan in the past decades and, to a certain extent, the recent history of Europe. We can gain insight from what’s happened elsewhere.”
Sandor Steverink
Head of Treasuries at Dutch Pension Fund APG Group NV
“Investors are forced to look at other asset classes for more attractive returns. This has pushed up prices in all accessible liquid assets and is causing long-term investors like APG to look even further away, outside the euro zone and in more complex or less liquid real assets.”
Rich Robben
Executive Director, Office of Investments at Kentucky Retirement Systems
“You can up your risk, or you can just be cognizant of the fact that there’s not that much return available and lower your assumed rates. Our assumed rate of return is the lowest in the country—5.25% for our really poorly funded plans.”
Carsten Quitter
CIO at Munich-Based Financial-Services Company Allianz SE
“In the future, we will continue to diversify even more into non-exchange-traded asset classes.”
Andrew Sawyer
CIO at Maine Public Employees Retirement System
“We have a pretty big allocation to infrastructure. We think that that is less correlated to the equity markets and provides diversification.”
Herschel Pant
Senior Consultant Relationship Manager at AXA Investment Managers
“In addition to negative rates, pension schemes are also becoming cash-flow negative as they continue to mature. This double whammy makes portfolio positioning a greater challenge than ever before—and one that requires long-term strategic alignment to their endgame. Using the right credit can help meet these dual objectives. Schemes must get comfortable with the fact that there may not be one perfect solution out there.”
Mark Delaney
CIO at Australiansuper Pty
“We’ve talked about our plans to allocate more to private equity over the next three to five years. As well as being able to stand the relatively illiquid nature of PE, there is also the structural benefit that sustained low debt costs favor the PE business model.”
Bo Foged
Chief Executive Officer at Danish Pension Fund ATP
“It’s going to be harder to earn money in the future. That’s why I say we’ve gotten returns in advance.”
Mikko Mursula
CIO at Helsinki-Based Pension Fund Ilmarinen Mutual Pension Insurance Co.
“Private credit has been growing in size in our asset allocations. There are products and managers and investment opportunities that’ll provide you a 2% to 3% return. Then if you go to the riskier part of the market, we are starting to see return levels of 10% to 12%.”
Reima Rytsola
CIO at Helsinki-Based Varma Mutual Pension Insurance Co.
“There have been some initial talks with banks asking whether we’d be interested in investing if they were to issue [a high-yielding capital relief] instrument. In this environment, we as an institutional investor have a big demand for assets that have a proper yield. But we don’t have any transactions lined up at this stage.”
David Stuart
CIO at Hobart, Australia-Based Pension Fund Tasplan Pty
“We would generally reduce exposure to negative yields, though once we’ve hedged back into Australian dollars, even some European negative yield bonds may give us a run-in.”
Ian Patrick
CIO at Brisbane, Australia-Based Superannuation Fund Sunsuper Pty
“We like some of the lending in the energy space. We’ve got a fair allocation to midstream and upstream energy assets.”
Reporting by Amanda Albright, Matthew Burgess, Ruth Carson, Leo Laikola, Kati Pohjanpalo, Benjamin Robertson, Frances Schwartzkopff, Romy Varghese, and Siobhan Wagner
©2019 Bloomberg L.P.
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