Why pension confidence in Europe is frayed

Europe’s pension plans see a big future for alternative credit, but faith is weak in their home region and strategies are being revised as a result.

Some surveys hedge their bets in their concluding comments. Full marks to asset manager Amundi and research boutique CREATE for publishing one this week that certainly did not. It spoke of a “new era of low returns and high volatility” and predicted that “booming markets are now history” and “there is no fuel left in this bull market”.

These are strong conclusions and hint that times have changed irrevocably. The survey canvassed 149 European pension plans representing total assets of €1.89 trillion. What it found was that these pensions have a view of Europe, in particular, that is decidedly downbeat.

They do not feel there has been enough political and institutional reform since the global financial crisis, and are worried that the EU’s response to the next crisis will be insufficient. The survey referred to “fears of another economic shock and fading trust in European political institutions”.

This disillusionment with institutions has helped give rise to populism in the view of pensions, and they view this as a long-term investment risk. In this time of turbulence and change, pensions are re-evaluating their investment strategies as they ascertain which exposures make the most sense in the challenging world of the future.

The good news is that two-thirds of the pensions canvassed – comprising around €1.26 trillion of capital – are now favouring some alternative assets, including private credit. The reasons cited include good diversification; low correlation with traditional asset classes; regular cashflow generation; and the ability to pay out retirement benefits regardless of the wider environment.

But while one side of the coin is the positive characteristics investors believe alternative assets offer, the other side is that so many other traditional areas of investment are currently out of favour. European government bonds, US equities, US investment grade corporate bonds, Japanese equities, hedge funds, currency funds – the list of investment options losing popularity is long.

Moreover, even though private credit is favoured, it should not be assumed that European private credit is. When asked where they would go to achieve the best returns, respondents cited Asia (especially India, but not China) and the US. Only 35 percent said Europe was likely to remain a place where decent returns could be achieved, and only a quarter felt Europe had healed from the 2008 crisis.

One powerful message that emerged from the survey is the need for the EU to set out a defining vision of what it wants to be in the future. Among the suggestions were strengthened monetary union and capital markets union and measures such as improved social welfare and reduced income inequality to help boost economic resilience and restore faith in the system.

As things stand, Europe seems to be a place many of its own pensions are keen to avoid being exposed to.

Write to the author at andy.t@peimedia.com