Enter the Dragon (year): Predictions for pension funds
The Year of the Rabbit turned out to be relatively good year for most pension funds in Asia.
Several pension funds reported gains on their investment strategies as benign developments in public markets, especially in the US and more broadly in developed countries boosted asset values.
That helped not just pension schemes like Hong Kong’s Mandatory Provident Fund (MPF), which relies exclusively on public market assets, but also others that had investments in private markets as well.
The question is, will the Year of the Dragon serve up an encore?
EVERYTHING IS CHANGING
Volatility and uncertainty in the global economy are at their highest in a generation, and profoundly so since the war in Ukraine escalated in February 2022.
High inflation and higher interest rates have disrupted equity and bond markets worldwide over the past 24 months and piled pressure on pension funds to adapt their strategies.
The shift from low inflation and low interest rates changed the macroecnomic scenario.
Some institutional investors now believe the US may have hit 'peak' interest rates and that both inflation and interest rates could slide lower from the second half the year.
This will require pension funds to tweak their investment strategies once again to adjust to changing realities.
NAVIGATING STAKEHOLDERS
In some countries like Australia, pension funds will be grappling with government-driven reforms as is evident by the "Your Future, Your Super" reforms.
Sustainable investing is another key area that is seeing heavy regulatory scrutiny especially in the US and Australia, making pension funds and other large institutions extremely wary about how they incorporate environmental, social, and corporate governance (ESG) factors in investment decisions as well as concerned about greenwashing claims.
Government influence, albeit indirect, will also likely be seen in other markets like Japan.
The government is keen to promote Japan as a regional wealth management hub, and is encouraging pension funds to entrust some money to up-and-coming asset managers.
The world's largest pension fund by assets, Government Pension Investment Fund (GPIF), while not officially confirming it is toeing the governement's line, announced in January 2024 that it would expand its selection pool of asset managers by scrapping certain criteria including minimum levels for pension assets under management.
STRIKING A BALANCE
Similarly, striking a balance on sustainability efforts has become important, as too big a commitment might risk the fund’s legitimacy, while too small a commitment risks opportunities being missed, and regulatory compliance is compromised.
Net zero commitments are a good example. Since setting the first net zero commitments in 2020, pension funds have had to swiftly learn how to navigate this new goal in condensed time spans.
Pension funds with net zero targets will have to speed up efforts while maintaining their asset allocation approach and obligations as fiduciaries.
This requires investment processes that are better placed to model, measure and adapt to systemic risks.
THE RISE OF AI
That might see them turn to new technologies, especially artificial intelligence (AI).
Pension funds, and other asset owners, are increasingly influenced by technological advancements and the development of AI in the asset management industry.
The objectives can range from delivering more accurate reporting, enabling better organisational flexibility, and sharing knowledge between investment teams more efficiently.
The use of generative AI – artificial intelligence capable of generating text, images, or other media using generative models – and large language models (LLMs) has significantly enhanced the scope of technological application at both pension funds and their service providers.