In a year of disease, war and inflation, one event struck fear into the heads of Australia’s super funds more than any other.

That was October’s UK pension crisis which, had it not been for the intervention of the Bank of England, would have rendered many pension funds insolvent.

While most Australian super funds would say they think deeply about ensuring they are never caught without enough emergency cash, that episode brought home just how quickly a liquidity crisis can evolve.

The aftermath of that is evident in responses of The Australian Financial Review’s CIO survey in which the $273 billion AustralianSuper revealed that it would create a specific role of chief liquidity officer.

All things being equal, liquidity should not be a major issue for pension funds with long-term investing horizons and net inflows.

But the evolution of institutional investing has meant that funds have taken on more liquidity risk to meet their investing targets and manage market risk.

That risk comes in the form of interest rate and currency derivatives in which counterparties may require cash to be posted when there are large market moves, and via extensive investments in private assets – such as private equity, property, infrastructure and loans.

The Liability Driven Investment (LDI) crunch in the United Kingdom involved a combination of those. UK pension funds effectively entered into derivative bets to hedge against rising interest rates and used its spare cash to invest in illiquid assets.

Read more @FinancialReview