By Thomas McHugh, CEO and co-founder of Finbourne Technology
Pension funds are caught between a rock and a hard place. On the one hand, they find themselves under relentless pressure to deliver reliable, long-term returns to meet their members’ growing retirement needs.
But on the other, the pursuit of higher returns is forcing many to expand their allocation to alternatives assets like private markets. This unearths a precarious predicament centred around liquidity.
Private markets may well pose a fertile hunting ground for lofty returns, but they are far less liquid than the bread-and-butter stocks and bonds in which pension funds typically invest. It is easy to see the tricky balancing act that emerges.
Higher returns are crucial to sufficiently fill retirement coffers, but so too is liquidity. Should pension funds fail to perform this balancing act effectively, the consequences could be severe. Arecent IMF report on liquidity risks put this beyond any doubt.
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The underlying issue is that assets like private equity and private credit can take several years to mature, while members may demand access to their funds at any time. This creates a liquidity mismatch that, during periods of market volatility, could pose serious operational challenges for pension funds.
To navigate the tension between liquidity and long-term growth, pension funds need more than just traditional methods — they require a single platform that provides a full view of their assets in one place.
Today, many funds rely on disconnected systems and complex spreadsheets to track their public and private investments, often resulting in operational inefficiencies and increased risk of error. In contrast, a single, integrated investment platform could provide pension funds with the transparency and control they need to manage liquidity more effectively.
Technology should serve as the foundation for meeting highly complex liquidity challenges outlined by the IMF. An integrated investment platform enables pension funds to manage both public and private assets within a single system, providing a holistic view that supports liquidity management.
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For example, advanced tools within an integrated platform allow funds to use standardised valuation models that streamline the investment process across asset classes. These tools reduce the need for manual, error-prone processes by standardising data entry and calculations, allowing funds to operate with greater accuracy and efficiency.
The ability to see all asset classes in one place, combined with powerful data tools, can give pension funds a clearer picture of when they will be able to realise investments. This visibility is essential for funds that need to balance long-term assets with short-term liquidity demands.
By consolidating data on both public and private investments, funds gain a deeper understanding of their portfolio’s liquidity profile, allowing them to anticipate potential cash flow needs and make informed decisions about asset allocations in response to market changes.
Pension funds will remain under pressure to evolve, but with the right tools, they can do so without leaving themselves eerily vulnerable to liquidity risk. Only by investing in technology that centralises data across all asset classes can pension funds harbour any hope of creating a more resilient structure for managing liquidity and achieving long-term growth, even amid market volatility.
