Interview with: Baroness Ros Altmann, Former UK Minister of Pensions

1. Interview with: Baroness Ros
Altmann, Former UK Minister of
Pensions
“In the last decade, monetary policy has
posed a huge new challenge to pension
funds,” according to Baroness Ros
Altmann, Former UK Minister of Pen-
sions. “The reduction in long-term
interest rates has significantly increased
the cost of providing pensions, resulting
in rising deficits. Thus many pension
funds needed to outperform liabilities
not match them,” she adds.
Baroness Altmann is a keynote speaker
at the marcus evans European
Pensions & Investments Summit
2019, taking place in Montreux,
Switzerland, 20 - 22 May.
Describe the current investment
landscape for pension funds, and
what they need to know.
Central bank policies and quantitative
easing (QE) have had many unintended
and unrecognised consequences. These
effects may be partly responsible for the
rise of populism, discontent with
established parties, Brexit, and Donald
Trump’s election.
QE has artificially inflated asset prices
and widened wealth inequalities.
Monetary policy has distorted invest-
ment and interest rate risk to the point
where the supposedly risk-free rate may
not be risk-free. QE also had a signifi-
cant impact on long-term liabilities.
Liabilities have increased more quickly
than assets, so trustees dealing with
rising deficits are under pressure to de-
risk, but that also reduces expected
returns. It is a negative cycle.
Managing risk and return is the new big
challenge for pension funds. We do not
know how risky the risk-free asset (i.e.
government bonds) actually is, and we
will not know for many more years.
What investment strategies would
you propose in such uncertain
times?
Rather than chasing government bonds,
they may be better advised to diversify
more and use derivatives to protect
downside. Traditional asset allocation
models and measures of risk are based
on an asset that may no longer be risk-
free. So one way to manage risk is to
diversify, look for different types of
investment return. Many asset manag-
ers are switching to infrastructure,
which can provide an inflation-linked
return that is better than index-linked
government bonds. If they invest in the
early stages it will be even better.
Pension funds are also diversifying into
social housing and build-to-rent.
What will happen next? Where does
that leave pension funds?
After this emergency monetary experi-
ment, we do not quite know when, how
and whether central banks will unwind
the policy. That has always been their
intention, which effectively means they
will need to sell massive amounts of
sovereign debt back into the market.
But who will buy all that debt?
The policy had enormous consequences
for pension investors, but I believe
there are additional consequences we
do not know about. Will there be
another crisis and if so would there be
another round of QE?
It is also possible that we will see a
major shake-out in both the bond and
equity markets for a while, as investors
are fearful of the volume of debt that
needs to be sold.
The markets will become very fragile if
central banks do unwind their holdings.
Perhaps central banks will collude with
each other, and possibly with govern-
ments and investment firms, to allow
holdings to mature without capital being
repaid. That would lower interest rates
even more when many in the pensions
world are waiting for them to rise.
QE has had significant unintended and
unexpected consequences, not just for
pension funds. Wealth inequality has
increased. Those who already owned
assets have benefited from QE, but it
has damaged those who do not own a
home or who save in cash. QE has been
like a tax cut for the wealthiest.
Dissatisfaction about rising inequality
may partly explain the Brexit vote and
the rise of populism. The damaging side-
effects of QE mean, in my view, central
banks must find alternative ways to
boost the economy.
Managing risk
and return is
the new big
challenge
for pension
funds
Prospering in a Challenging
Pensions Investment Environment

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About the European Pensions & Investments Summit 2019
The 19th annual European Pensions & Investments Summit is the ultimate meeting
point, bringing elite buyers and sellers together. The Summit offers regional pension
investors and international fund managers and consultants an intimate environment
for focused discussion of the key new drivers shaping institutional asset allocations.
Taking place at the Fairmont Le Montreux Palace, Montreux, Switzerland, 20 – 22
May, the Summit includes presentations on alternative investment avenues, risk
management, conquering the low interest rate environment by securing long-term
investment opportunities, and achieving ESG integration across the entire pension
portfolio.
www.epi-summit.com
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http://events.marcusevans-events.com/epi2019-ros-altmann