FT. Pension funds should be “extremely careful” when investing in illiquid assets, as rising interest rates and falling stock markets increase the likelihood of their having to access cash quickly, the OECD has warned.
In the recent era of low interest rates, pension funds poured money into alternative investments, such as infrastructure projects and private equity, in an effort to escape the low yields available on government bonds.
But such investments are typically illiquid, meaning the funds cannot quickly convert them into cash if needed. While there has been little need for funds to do that over the past decade, the UK pension crisis in October exposed how a sharp rise in interest rates can change that.
“There is a call now for greater flexibility in regulation to allow [defined contribution] schemes to invest in illiquids and infrastructure and this is fine,” said Pablo Antolin, principal economist at the private pension unit of the OECD Financial Affairs Division. “But we also have to be extremely careful because liquidity issues are very important in the management of investment strategies.”
Alongside the liquidity risks, the OECD cautioned that the level of due diligence required on alternative investments is likely to be beyond the reach of many smaller funds.
