Why Managing Liquidity is Important for Pension Funds?
Pension funds have traditionally been viewed as long-term investors. They are an investment vehicle in which individuals invest over the course of their working lives and remove money only after the age of retirement. Hence, liquidity was not considered to be a very big problem for the pension fund industry until recently. However, in the recent past, many drastic changes have taken place in the pension fund industry. As a result, liquidity has become a challenge for the pension fund industry.
In this article, we will have a closer look at why liquidity management has become a challenge for the pension fund industry and what can be done to better manage liquidity in this industry.
Why Liquidity Has Become a Problem?
The nature of the pension funds business and their investments has changed drastically over the past few years. This has happened because of some key changes that have taken place in the macro-environment. The two most important ones are as follows:
Liquidity Lessons From 2008
The recession which happened in 2008 was a turning point for the pension funds industry. This is because the world was exposed to the perils of liquidity risk in the new world order. The 2008 crisis saw a credit freeze take effect. This meant that it was almost impossible for any financial institution to sell their assets and generate cash to pay off their creditors. There were several asset classes that were impacted by this credit freeze. Interbank markets that are considered to be very safe were also witnessing an absence of investors.
Now, since pension funds are invested in many risky assets, there is a chance that they may be exposed to a similar situation in the near future. This can be detrimental to the entire economy since if a pension fund defaults, a large number of people will become reliant on welfare payments. It is for this reason that governments all over the world have started taking note and have also created regulations to ensure that pension fund managers are not reckless when it comes to managing pension fund finances.
How does Liquidity need to be Managed?
Since liquidity management has become a buzzword in the pension fund universe, many funds have become proactive in setting up policies that enable them to convince investors and governments that they are managing their liquidity effectively. This is usually done with a three-part strategy.
The bottom line is that liquidity management has become a central area in the field of pension fund management because of the various changes which have taken place in the macroeconomic environment.
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