Eighty-five per cent of pension schemes believe that the financial markets will have a W-shaped recovery, according to research by Amundi and Create-Research.

The survey of 158 respondents from 17 pension markets across the public and private sectors, collectively managing €1.96trn of assets, found that pension funds value portfolio resilience above everything else.

The report highlighted the “toxic” side effects that central banks’ and governments’ policy, in response to the pandemic, has had on pension schemes. This includes increased liabilities and dwindling incomes from low-interest rates. Alongside the market meltdown in March 2020, these have ravaged funding ratios worldwide, the report noted.

The W-shaped, or accordion-shaped recovery, predicted by pension schemes are both volatile by nature. Most respondents felt it was likely that central banks will lose their independence from their governments (84 per cent) and inflation will follow deflation after the current crisis is over (77 per cent). Finally, the overwhelming majority of those surveyed believe asset returns will be lower this decade than the previous ones (90 per cent).

Commenting, Create-Research professor Amin Rajan, said: “Assessing the macroeconomic damage of Covid-19 is akin to looking through a kaleidoscope: different images appear with each turn of the dial. However, one thing is certain: the longer the pandemic lasts, the greater the economic damage to pension plans.”

As a result of the heightened uncertainty, 76 per cent said that investing has to be long haul. Seventy-five per cent of those surveyed will target private markets to achieve custom-built resilience, whereas high-quality cash flow compounders among global equities will top the asset allocation choice for 76 per cent of respondents looking to build antifragility into their portfolios.

Over half (58 per cent) will turn to thematic investing for inherent resilience via secular themes. Since sovereign bonds are expected to make minimal total returns, risk tools will rely overly on other means.

Greater scenario planning will be the preferred approach used by schemes to manage risk in portfolios over the next decade (61 per cent) whilst almost two thirds (57 per cent) will rely primarily on liquidity management. Diversification will remain a massive cornerstone in investing – be it based on asset classes (55 per cent) or risk factors (54 per cent).

Commenting, Amundi group chief investment officer, Pascal Blanqué, said: “Covid-19 has forced governments and central banks to embark on a ‘whatever it takes’ wartime-type monetary response. The long-term impacts on financial markets only become evident in hindsight. Faced with such uncertainty, portfolio resilience and antifragility will be the new guiding star for pension investors.”

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