Pension funds should reflect on their true purpose

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With COVID-19 infection rates rising across Europe it seems clear that lockdowns are not over yet. Europe will suffer economically as well as socially and politically.

Policymakers are doing their part but their actions have negative consequences such as growing debt levels and low interest rates. This creates an environment characterised by high volatility and low yields. Achieving return objectives is challenging in such conditions.

At the same time, it could be argued that institutions, including pension funds, are among the social actors that can achieve more in terms of fighting the pandemic’s effects.

Bringing the world economy back from the brink will take huge investment. The size of the assets pension funds can invest depends upon employer and employee contributions. Ultimately these depend on the economy’s health.

However, through their asset allocations, pension funds can direct investments to high-growth enterprises and projects that can accelerate the economic recovery.

Most pension funds still mention paying pensions as their overriding objective. Concepts such as responsible investment, sustainability and ESG can be interpreted as means to achieve that primary objective. The common view is that investing in unsustainable businesses compromises long-term returns.

The question of whether pension funds should consider objectives that go beyond paying pensions, such as aiding the recovery from COVID-19, still has a negative answer in most cases.

Unsurprisingly, pension funds are reluctant to spell out what they are doing, in terms of investment decisions, to help the recovery from COVID-19, let alone to shape the future.

But there are ways to adapt strategies to support the recovery without sacrificing their objective. The cover story in this issue provides suggestions.

COVID-19 should prompt pension funds to reflect on their purpose. More credit should be given to the argument that simply paying out pensions is insufficient. Unless, that is, retirees can enjoy them in a world that is more prosperous for everyone. A world where pollution is minimised and societies are freer, more cohesive and supportive.

Obviously, it takes more than just an asset allocation decision to achieve this. But it is a good start.

Thanks to their size, complexity and urgency of their mission in an ageing world, pension funds are more than just asset allocators. They are the stewards of capital and wield power. COVID-19 calls them to put their influence to good use.

Pension funds should reflect on their true purpose