Over the past decade, pension funds have increased their investments in private assets to enhance returns through the illiquidity premium. However, they are now reconsidering the potential liquidity risks associated with this strategy. According to a new global survey conducted by Ortec Finance, a specialist provider of risk and return management solutions for pension funds, nearly 18% of pension funds report not having enough liquidity to withstand adverse scenarios.
The study, conducted in the United Kingdom, the United States, the Netherlands, Canada, and the Nordic countries, surveyed senior executives from pension funds managing a total of $1.451 trillion in assets. It found that, in addition to the 18% reporting insufficient liquidity, another 62% believe they have enough liquidity for most scenarios but acknowledge that extreme situations could pose challenges. In contrast, only 20% say they have no liquidity concerns.
Fund managers identify both short- and long-term risks, with long-term liquidity risk being the primary concern among respondents. About 60% cite this as the main risk facing the funds they manage, while 25% consider short-term liquidity risk to be the most significant. Only 15% believe that short- and long-term risks are roughly equal.
The increase in exposure to private assets is part of the reason behind liquidity concerns, particularly among defined benefit (DB) pension schemes. Among the managers surveyed, 80% reported that unfunded commitment risk represents either a significant or moderate threat to the DB pension industry over the next three years. Overall, 25% of managers believe that unfunded commitments beyond the control of pension portfolio managers pose a significant risk, while 19% do not consider it a risk.
Despite these liquidity concerns, 58% of respondents state that liquidity is already well managed, and 28% believe other risks are more pressing. Meanwhile, 10% consider liquidity risk a priority, while 4% say it is not a major concern.
“Our study highlights the liquidity challenges facing pension funds, particularly given the unpredictability of projecting unfunded commitments and capital calls. To address this issue comprehens
Pension Funds Increase Private Asset Exposure but Face Growing Liquidity Concerns
Over the past decade, pension funds have increased their investments in private assets to enhance returns through the illiquidity premium. However, they are now reconsidering the potential liquidity risks associated with this strategy. According to a new global survey conducted by Ortec Finance, a specialist provider of risk and return management solutions for pension funds, nearly 18% of pension funds report not having enough liquidity to withstand adverse scenarios.
The study, conducted in the United Kingdom, the United States, the Netherlands, Canada, and the Nordic countries, surveyed senior executives from pension funds managing a total of $1.451 trillion in assets. It found that, in addition to the 18% reporting insufficient liquidity, another 62% believe they have enough liquidity for most scenarios but acknowledge that extreme situations could pose challenges. In contrast, only 20% say they have no liquidity concerns.
Fund managers identify both short- and long-term risks, with long-term liquidity risk being the primary concern among respondents. About 60% cite this as the main risk facing the funds they manage, while 25% consider short-term liquidity risk to be the most significant. Only 15% believe that short- and long-term risks are roughly equal.
The increase in exposure to private assets is part of the reason behind liquidity concerns, particularly among defined benefit (DB) pension schemes. Among the managers surveyed, 80% reported that unfunded commitment risk represents either a significant or moderate threat to the DB pension industry over the next three years. Overall, 25% of managers believe that unfunded commitments beyond the control of pension portfolio managers pose a significant risk, while 19% do not consider it a risk.
Despite these liquidity concerns, 58% of respondents state that liquidity is already well managed, and 28% believe other risks are more pressing. Meanwhile, 10% consider liquidity risk a priority, while 4% say it is not a major concern.
“Our study highlights the liquidity challenges facing pension funds, particularly given the unpredictability of projecting unfunded commitments and capital calls. To address this issue comprehensively, funds should focus on scenario modeling and stress testing. Modeling capital calls and private asset distributions can help funds understand their potential liquidity constraints in worst-case scenarios over the next five, ten, or twenty years,” says Marnix Engels, Managing Director of Global Pension Risk at Ortec Finance.
For Funds Society, Madrid
