One in five pension funds (18%) admit they lack sufficient liquidity to withstand adverse scenarios, while 62% acknowledge that liquidity could become problematic in extreme cases, according to a survey by pension funds solution provider Ortec Finance.

The survey, which polled senior executives managing $1.451 trillion in assets across the UK, US, the Netherlands, Canada, and the Nordics, revealed that just 20% of funds are confident in their liquidity positions. Long-term liquidity risks emerged as the primary concern for 60% of pension plan managers, while 25% flagged short-term liquidity as their biggest challenge. Only 15% said short- and long-term risks are equally significant.

Over the past decade, pension funds have increased allocations to private assets, seeking to capitalise on illiquidity premiums to enhance returns. However, according to the researchers, this shift has heightened concerns about liquidity management. Among defined benefit (DB) schemes, 80% of managers cited unfunded commitments as a notable risk to the industry over the next three years. Specifically, 25% believe unfunded commitments pose a significant risk, while 19% see them as negligible.

A majority of managers remain optimistic about their ability to manage liquidity effectively though. More than half (58%) reported that liquidity is already well-managed, and 28% ranked other risks as more pressing. 10% described liquidity as their primary concern, and 4% downplayed its significance.

Marnix Engels, managing director, global pension risk at Ortec Finance, said: “Our study highlights the liquidity issue that pension funds are facing, especially given the largely unpredictable nature of projecting unfunded commitments and capital calls. To address this issue thoroughly, funds should focus on scenario modelling and stress testing.”

He added: “Scenario modelling of the capital calls and distributions of private assets can help funds understand what their liquidity constraints may be in the worst-case scenarios in the next five, 10, or 20 years,” he said.
Liquidity concerns differ among pension funds, as per the survey. Most focus on long-term risks due to managing assets with long investment horizons. However, short-term risks, like market volatility or sudden capital calls, also pose challenges.
Engels suggested that integrating advanced analytics and forward-looking tools could help funds strike a balance between maximising returns and maintaining sufficient liquidity. “The key is to ensure funds have the flexibility to meet their obligations without compromising on investment opportunities or stability,” he concluded.

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