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