By 2020, the largest pools of pension fund assets are projected to remain concentrated in the US and Europe. In North America, pension fund assets reached $19.3 trillion in 2012 and PwC estimates that by 2020, pension fund assets will rise by 5.7 percent a year to achieve over $30 trillion of the $56.5 trillion in total global assets, more than 50 percent of the global total.
Indeed, according to the PwC report, Asset Management 2020: A Brave New World, demographic changes, accelerating urbanization, technological innovations and shifts in economic power are reshaping the asset management environment where pension funds have been playing and will play an outstanding role in the global saving and investment process. Three key factors seems to stimulate the global growth in assets: i) changes in government-incentivized or government-mandated retirement plans that will turn out to increase the use of defined contribution (DC) individual plans; ii) faster growth of high-net-worth-individuals in South America, Asia, Africa and Middle East regions up to 2020; iii) the expansion of new sovereign wealth funds.
However, in spite of the pension funds’ power to centralize huge amount of “savings from workers”, in this scenario of financial globalization, workers do not seem to have strong defense against the impacts of the current global scenario on the savings of workers and the flows of workers’ income.
In a context of uncertainty, the pension funds’ portfolio management is based, as Keynes warned, on precarious conventions. Pension funds are part of a set of interrelated balance sheets and cash flows between the income-producing system (hedge, speculative and Ponzi firms) and the financial structure that affect the valuation of the stock of capital assets, the evolution of credit and the pace of investment. Current pension funds’ performance ultimately relies on the endogenous nature of financial instability. Throughout the business cycle, when profits decline, as they inevitably do, credit and external sources of funding generally become restricted and the price of assets also fall. This scenario affects the performance of these institutional investors and reduces the value of the stock of workers’ savings in pension funds.
As a matter of fact, the connection between pension funds and speculative finance is one of the contemporary features of the management of the working savings. Continued low interest rates would impact the future profitability of pension funds, particularly in those portfolios where income-fixed assets predominate.
Among other current challenges to the management of pension funds is the evolution of austerity programs. In many countries, austerity programs have also relied on changes in retirement plans. Soon after the global crisis of 2007-2008, many European countries announced austerity measures that included changes in retirement age and pension payments. As a result, loss of retirement rights has turned out to become part of the new set of public policies.
Indeed, many governments, under global investors’ pressure, should meet budgetary targets and pursue further structural reforms- also related to age and amount of pension within retirement plans. In truth, the current era of financialization and austerity – and its impacts on retirement plans and job creation – is certainly affecting day-to-day life of workers and the future of pensions. In other words, it is affecting the flows of workers’ income and the savings of workers.