Day 1: New Ideas for a New Decade
The conference was kicked off by Chris Battaglia, Nikki Pirrello and Elizabeth Pfeuti, who joined from New York, London and The Hague and later led through the event in the virtual lobby.
The first panel discussion focused on how long-term strategies can survive short-term turbulence. Participants were Magnus Billing (Alecta), Mark Fawcett (NEST) and Rohaya Mohammad Yusof (Employee Provident Fund Malaysia). The greatest challenges cited by the experts were climate change which could reach a point of no return, rising wealth inequality with associated political and social risks, the search for returns and difficult demographics. With regard to the ability to cope with crises, a mix of three things was identified: The disciplined implementation of long-term coherent and diversified strategies, sound risk management, and the flexibility to question existing assumptions and frameworks while also learning from history. Fawcett referred to parts of the fossil fuel industry as stranded assets. Billing spoke of climate change not only as a threat but also as an investment opportunity. And Yusof, despite all the prophecies of doom, saw the US as of central importance; the position of the US dollar was not at all endangered, she said.
In the following presentation Rolf Strauch introduced some interesting points around the geopolitics of European financial markets. In his opinion, Europe should not close itself off, but focus strategically on certain trading partners and areas of globalization. He sees great potential above all in the future of banking and capital markets union. Regarding the current situation, Strauch pointed out that the economy is recovering from Corona, but a gap of two to four percent remains. He also said that investments are significantly lower, which has a negative impact on future growth potential. A further problem is that pension funds have to take increasingly higher risks in order to achieve adequate returns at all.
In the second panel discussion, Richard Tomlinson (Local Pensions), Brian Hellmer (State of Wisconsin Investment Board) and Elias Masilela (DNA Economics) spoke about investment ideas in the new economic environment. Tomlinson was confident that sooner or later we will return to normal and that investment strategies are therefore primarily concerned with the time horizon. Hellmer spoke of tactical opportunities in the short term, while in the long term it is not certain whether the economy can really return to the old level quickly without structural damage. In particular, he questioned the role of government bonds, which no longer provide returns but only diversification. Masilela pointed out that it was important to reduce the growing inequality within a society and between countries. To do this, the government must first and foremost set the right framework, rather than trying to solve all the problems itself.
Day 2: The Green Rebuild
Sustainability dominated the second day of the conference. The first panel discussion focused specifically on the progress made in the UK. Lord Grimstone (UK Government) pointed out that the country is at the forefront of international efforts to decarbonise and intends to continue to play a leading role. Simon Sweetinburgh (Department for International Trade) presented the innovative smart campus project Gravity, which is currently being developed in the southwest of England and is intended to give companies a sustainable locational advantage. Simon Banham (British Embassy) explained why investments in Great Britain are advantageous: The country offers attractive conditions for companies such as well-trained personnel, a strong focus on innovation and favourable tax legislation. Simon Devenport (RWE Renewables) presented his assessment of the stated goal of building a net zero emissions economy by 2050. This requires considerable transformation of existing structures, which would allow for large, politically supported investment opportunities, as currently seen in offshore wind.
In the second presentation, Dr. Ben Caldecott (UN Climate Change Conference) and Sir Roger Gifford (Green Finance Institute) spoke about the progress of the financial industry on climate issues. Caldecott mentioned insufficient commitments at the climate conference five years ago, which is why the Paris Rulebook must be finalized in Glasgow next year and, ideally, a legally binding framework must be created. Instead of another big summit with mere promises, the aim should be to make transparent, measurable and binding commitments. Both the public and the private sector are needed to ensure the necessary success. Gifford took a more positive view of the situation and spoke of a rather high pace of developments so far. At the moment, he said, the aim was to close the project gap: to create enough investable projects for the trillions of available capital. This is a technology story, he said, in which companies could benefit going forward from developing new low-cost solutions. Gifford added that alongside climate change, the loss of biodiversity is at least as urgent a problem that must be tackled.
The last panel revolved around the topic of divestment. David Hickey (Lothian Pension Fund) described the mere divestment as a kind of moral greenwashing, which rather serves the good conscience or marketing activities. In fact, the decisive factor was not the secondary market, but the primary market with new financing. However, green investments alone should not be the primary goal of a pension fund; it is still all about meeting financial obligations in full and on time. The other panel participants, Kirsty Jenkinson (CalSTRS) and Terry Heymann (World Gold Council) agreed. Jenkinson said that despite all the uncertainties individual US states such as California made clear progress in sustainability. In order to push this forward, investors would have to think long-term and get actively involved (stewardship). Hickey added that alliances of asset owners could be a real game changer here in the future.
Day 3: Innovation
The third day started with Nobel laureate Robert Merton (MIT, Harvard University). He presented various components that together make it possible to develop an integrated approach to pension funding. These include both modern defined-contribution plans as well as more traditional defined-benefit plans, the latter of which are perceived as more secure, but also the protection of people who are not provided for and the expansion of personal retirement options. In addition, structures could be created to integrate pensions into a broad life-cycle model and to enable people to work longer under appropriate conditions. According to Merton, the most important thing is to ensure a certain level of real income instead of focusing only on the amount of absolute disposable assets.
The second presentation focused on the practice of pension management from the perspective of young people. Sujan Lahiri (FNV) and Matt Sims (Young Pension Trustee Network) explained their experiences. Lahiri said that young people have little confidence in pension systems because they do not see their advantages in them. Sims added that the issue is very complex and difficult to understand, but that there is also a lack of basic education, for example in school. Both agreed that systems should be simplified and include a holistic approach to achieve greater engagement.
The subsequent panel discussion focused on the challenges surrounding pensions, as well. Margriet Nip-Westendorp (Stichting Pensioenfonds Hoogovens) began by informing the participants about the new pension agreements in the Netherlands, which are to be implemented by 2026 and represent a major challenge. An important part of this is the transition from the defined-benefit system, which is considered outdated, to the modern defined-contribution system. Sandro Doudin (Zurich Insurance) saw the challenge in the fact that everyone has to take care of their pensions themselves, from initial saving to long-term thinking, which puts many people off. Nikolaj Pedersen (PRI) cited sustainability as a key factor in avoiding systemic risk outside the classic risk/return profile, enabling active stewardship and bringing allocation in line with ESG criteria.
The last two presentations focused on the topic of artificial intelligence. Daniela Rus (CSAIL, MIT) gave an overview and named robotics and machine learning as key areas. The goal is to view artificial intelligence as an assistant that performs certain tasks such as pattern recognition, risk analysis or operational process support, but not in terms of an actual job. In other words, man and machine should work together more closely in the future, because together they are more effective. In most areas, transferring job roles to algorithms alone and letting them act autonomously is not conceivable in the foreseeable future.
The final panel discussed further questions about artificial intelligence. Charles Wu (State Super) named the decisive challenges for applications in the markets: Poor signal-to-noise ratios, weak stationarity and difficult-to-explain relationships between input and output. Therefore artificial intelligence should only be used in parts of the investment process. The other two panel participants, Terhi Halme (APG) and Ashby Monk (Stanford University), agreed. Ashby added that there is no innovation without the potential for error, which is why the focus should initially be on processes beyond the particularly difficult alpha generation: risk management, operational processes and passive investment criteria. Any freed-up capacity could be used effectively by actual people to perform higher-value tasks. Humans would always have a relative advantage over machines in all areas that require human interaction, so that the important jobs in the financial markets would hardly be rationalised away in the foreseeable future.
Day 4: Long-Termism
The kick-off presentation of day 4 was given by Ronald Wuijster (APG). He spoke about the fact that asset owners have always had to deal with constantly changing conditions. Although Corona was a special situation in view of the enormous stimuli, much had already been set in motion: A slowdown in production growth, rising debts and the search for returns. Wuijster named possible solutions such as further cost reductions, the inclusion of better data and technologies, and optimized talent and knowledge management. As for specific investments, he mentioned the infrastructure sector to be particularly interesting.
The following panel discussion focused on private versus public investments. Simon Pilcher (USS) spoke of the need to include inflation-linked components in the search for returns in order to be able to meet future obligations on a real basis. The advantage of pension funds is that they have illiquid, decade-long liabilities, which allows for correspondingly long-term characteristics of the assets. Andrew Halsey (ABB Group) agreed and added that for this reason, but also because of the usually better returns, private investments in real estate or private equity are very attractive. Katja Solovaara (NYC Retirement Systems) added that the importance of private assets is likely to continue to grow. Another advantage, she said, is that a more direct involvement with companies is possible, so that sustainable criteria can be enforced much better.
After noon, a comprehensive presentation by John Sitilides (Trilogy Advisors) on geopolitics followed, which can hardly be summarized in a few sentences. He argued that there is no end in sight to globalization and that we are likely within a re-globalization. He said that the waterways, on which around 90 percent of world trade is conducted, are of particular importance. China, however, was increasingly viewed negatively. Hopes for a free, democratic development and compliance with human rights have been disappointed time and again. The country makes smaller nations dependent on itself through loans, mixes civil and military intentions, and behaves untrustworthy towards trading partners. The goal of the Western world must be to persuade China, in the country's own interest, to finally become more diplomatic and abide by the rules of the game.
The next presentation was held by Tom Orlik (Bloomberg Economics). According to his analysis, the recovery from the Corona shock so far contains a good portion of optimism, which is why potential risks may be underestimated. In most recessions, there was initially only an L-shaped recovery, so current expectations could turn out to be exaggerated. Potential risks are a renewed Corona wave, a draw in the US election with corresponding postponement of further stimulus and a decoupling of China from the US and other trading partners, although the latter seems rather unlikely.
In the final panel Debby Blakey (HESTA), Gabriel Bernardino (EIOPA) and Clive Lipshitz (Tradewind Interstate Advisors) spoke about the future of the pension landscape. Blakey was optimistic and said that the Millenials generation is open to change and will play central roles in the future, which could lead to significant positive change. In addition to the search for returns, it will be even more important in the future to really think long-term and act sustainably. Lipshitz pointed out that the US pension system used to be in surplus, but now has a significant deficit. He said that only superficial issues such as the returns achieved were discussed, but not crucial structural problems and unrealistic assumptions. Although pensions can be calculated well with demographic data, possible leaps in life expectancy represent a major unknown. Bernardino spoke of the fact that pension systems around the world face similar challenges, so that we can learn from each other. In Europe, he said, there is a patchwork of different, overpriced systems. There is a lack of political will to act in a future-oriented manner and to work on the transition from defined-benefits to defined-contributions. Ideally, there would need to be a Europe-wide standard solution that is simple, transparent and cost-effective.
Day 5: Navigating Now
The last day of the conference started with a panel discussion on communication and engagement in pension systems. Katie Selenski (CalSavers) spoke of a rather high participation of people with low income, which makes her confident for the future. But first of all, she said, the aim is to reach as many people as possible with the set-and-forget principle. Ivana Zanardo (HOOPP) described that many people have little confidence in pension systems and tend to trust external consultants. This makes communication that addresses real needs all the more important. Gregg McClymont (IFM Investors) added that few young people are interested in pensions, while some of them make their investment decisions without any expertise. All agreed that communication should be specifically tailored to individual age groups.
In the second round of discussions, the question was whether risks were really being reduced in pension funds. Barry Kenneth (Pension Protection Fund) saw risks primarily in the areas of regulation and reputation, but also in current issues such as high valuations and debt. Alessandra Cardoso (Nestle UK Pension Fund) described the trend towards closing defined-benefit plans. While this would reduce equity ratios and thus volatility, it would also reduce returns, and create risks in the areas of credit and liquidity. Simon Frechet (Bruce Power) added that market risks had to be taken in order to achieve attractive returns at all.
The third panel discussion revolved around the question of how to invest in today's world. Cheryl Alston (Retirement Fund Dallas) pointed out the better performance of sustainable funds so far and spoke of an expansion of allocations there. In addition, she mentioned opportunities in infrastructure and private equity. As for the Corona recovery, Alston described a K-shaped pattern: economically better-off groups of the population were on track, while disadvantaged groups were still hit hard. Further support was needed for the industries shaken by the crisis, especially small businesses. According to Troy Rieck (LGIAsuper), it would be a major challenge if inflation were to occur, while only low returns could still be achieved. Luc Olivier (La Financiere de l'Echiquier) said that the inflation and economic cycle would give rise to preferences for growth or value, and that growth would probably continue to benefit for the time being.
The final keynote presentation was given by Mariana Mazzucato (University College London). In her view, the economy needs to be rethought in order to become innovative and sustainable and to involve people on a broad scale, which would enable the reduction of the increasing wealth inequality. Shareholder value is no longer the sole objective, but all stakeholders must be taken into account. She sees a central problem in today's narrative, namely that the state is now only perceived as a problem solver rather than a proactive factor. In fact, however, many technologies are based on the results of state-funded basic research, without which the success of many companies would not have been possible. As a solution, she proposes a mission-oriented policy to drive research and development. In addition to the risks, the later returns would also have to be distributed appropriately. In this way, in addition to future growth, a truly collective value could be created, which would enable a fair, balanced economy.
It was a good idea to extend the conference to five days, as participants have a shorter attention span at online events. Technically, there were only minor glitches, which were solved quickly and pragmatically. In addition to the presentations, the possibility of taking part in virtual networking was refreshing: Two participants were randomly connected to each other for three minutes with video and sound.
In terms of content, the focus was, of course, on pensions. The discussions revolved around current developments as well as challenges for the systems in Europe, the US and Australia. The most important tasks for Europe are the transition from defined-benefit to defined-contribution as well as the standardisation of systems. In general, the experts saw challenges above all in people's low interest in their pensions, the increasingly difficult search for returns and the unequal distribution of wealth in society. Possible solutions discussed included committed stewardship, investments in potentially higher-yielding projects in infrastructure, private equity and sustainable assets, and rethinking our general economic order.
In addition, however, an amazingly wide range of related topics was offered. Some of the views that repeated during the conference were the rapid and coordinated response of central banks and governments in the wake of the Corona crisis, the challenges of the zero interest rate environment and the enormous importance of sustainable investments. On the latter point in particular, the positive assessment that the financial industry is fulfilling its responsibilities outweighed; but also that the younger generation has a much more urgent view of climate change and related challenges and is ready to make a difference.