Pension Funds Letter 13 - A defining moment for pension funds?

Summary

EDITORIAL

A defining moment for pension funds?

When we reflect back on 2021 in years to come, will we see it as a turning point leading to fundamental change in the way we live, a missed opportunity, or merely an interlude before “ordinary” life continues? No matter the outcome, in the here and now, our societal norms and practices, from politics, consumption habits, working practices, and even well-established financial narratives appear under ever-increasing scrutiny.

The COP26 was a focal point for much of this attention. While the summit was generally recognized as a success, it remains to be seen whether the commitments made in Glasgow will successfully change our course onto a sustainable pathway.

As the Amundi-CREATE report shows, asset owners, such as pension funds, have participated considerably to the growth in ESG investing and their role will only expand if we are to meet the financing needs outlined at COP26 that will be required to fight climate change, support the energy transition and meet net-zero targets. At the same time, deep-seated inequalities exposed by the pandemic need to be addressed.

Pensions are also facing their own critical juncture, with the pandemic only compounding the already complex combination of ageing demographics and low interest rates in their impact on pension finances. This leaves many with the dilemma of how to find a balance between discharging their pension obligations whilst also looking to reduce deficits.

The demographic challenges faced by pension funds highlighted by the Amundi-CREATE report are formidable and in addition, many of the long-term consequences of COVID-19 are yet to be fully understood. It is however clear that pension schemes have to prepare for radical changes, both led by political reform and from sustained lower growth prospects, after facing a worsening environment for years. One clear sign of this evolution is the increasing number of Defined Benefit (DB) plans, whose days are numbered according to many, considering switches to Defined Contribution (DC).

As we prepare to step into 2022, it’s not merely the world at large, but also pension funds that need to make some difficult decisions about our future. But we should not forget there is no challenge too big that cannot be overcome through collective effort.

EXECUTIVE SUMMARY