pension funds’ role and opportunities in long-term investments idar kreutzer, ceo, finance norway...

PENSION FUNDS’ ROLE AND OPPORTUNITIES IN LONG-TERM INVESTMENTS

Idar Kreutzer, CEO, Finance NorwayNordic Conference on Green Investments and Nordic Pension Funds, May 27 2015

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Risk management - when risks collide

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Transitioning from high to low carbon economy require significant investment

In the next 15 years…

Source: Better growth, Better Climate – The New Climate Economy Report

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Insurers are the largest institutional investors in Europe

Source: ”Funding the future”, Oliver Wyman, 2013

Liability driven investmentsValuing liabilities – and matching the duration

If the liabilities' duration is 15, then a 2 percentage points fall in interest rates alters the present value of liabilities with 30% if this change is simply carried through for the purpose of liability valuation

Which assets (apart from too few long dated bonds) yield 30% with certainty over 4 months?

Stylistic example of liabilities

2 % point fall in rates

Assets100

Liabilities100

Liabilities130

Assets100

30% increase in liabilities

Example: duration 15

Source: Bloomberg 20 yrs swap

?

2,53

3,54

4,55

5,5

SEK EUR GBP

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Limited investments in infrastructure

Source: ”Funding the future”, Oliver Wyman, 2013

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Changing framework conditions affect insurers’ ability to invest long-term

A raft of regulatory changes are affecting insurers

Source: ”Funding the future”, Oliver Wyman, 2013

Key implications

Regulatory asset risk will become a key driverAsset-liability-matching strategically importantIncreased focus on liquidity and rating

Affects insurers’ investment decisionsMoving away from long-term assets

Distorting effect on financial markets and the economyHigher cost of funding for corporates and governments

Source: Oliver Wyman, ”Funding the future”, 2013

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Expected demand for investments in urban infrastructure until 2030 (US$ 1000 billion)

Ports and airports

Roads and railways

Energy

Water

0 5 10 15 20 25

Assets under Management, % of GDP

Source: Deutsche Bank and G20/OECD Policy Note on Pension Fund Financing for Green Infrastructure and Initiatives

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A perfect match

The responsible investment framework