Despite 58% of U.S. pension plan managers stating that their funding status has improved over the past year, 68% indicate they will increase—or are likely to increase—contributions this year. Additionally, 66% say they will raise their budget and focus on scenario modeling, asset and liability management, and stress testing over the next two years.
These findings come from a survey conducted by Ortec Finance among senior executives of U.S. pension funds, whose plans collectively manage $670.4 billion in assets.
The increase in spending on scenario modeling is driven by expectations of heightened risk, with 84% of managers predicting a high-risk profile this year—26% of whom anticipate a drastic rise in risk. Furthermore, half of the executives report that their risk profile slightly increased last year.
Around one in five surveyed U.S. pension plans admitted to lacking sufficient liquidity to withstand adverse scenarios. Meanwhile, 60% believe they have enough liquidity for most situations but acknowledge that extreme scenarios could pose challenges.
Short- and Long-Term Risks
Surveyed managers perceive risks over different timeframes, but their primary concern is long-term liquidity risk. About 62% consider it the biggest risk faced by their plans, while 20% cite short-term liquidity as their primary concern. Only 18% view short- and long-term risks as roughly equal.
The increased exposure to private assets is one of the key reasons for liquidity concerns, especially among defined benefit plans.
Among the managers surveyed, 74% believe that the risk of unfunded commitments poses either a significant or moderate threat to the retirement pension sector over the next three years.
Despite these liquidity concerns, 56% say liquidity is already well managed, and 32% believe other risks are more pressing. Only 4% identify liquidity risk as a top priority, while 8% do not see it as a major concern.
According to the Ortec Finance survey, 74% expect private equity distributions to increase over the next three years, and 90% say this will impact their pacing strategy.
For pension funds, investing in private assets creates liquidity constraints. However, 40% cite returns and illiquidity premiums as the primary reasons for investing in private assets. Meanwhile, 34% point to diversification as the most important factor, and 26% emphasize inflation protection.
Richard Boyce, Managing Director for North America at Ortec Finance, concluded, “It is encouraging to see that pension funds plan to increase their budget for stress testing and scenario modeling to uncover risks, find new opportunities, and navigate uncertainty.” Boyce believes that with rising geopolitical and market uncertainty, “scenario modeling is one of the best tools to help pension funds navigate these uncharted waters.”
For Funds Society, Madrid