Larry Fink’s Top Four Questions for Pension CIOs

(March 5, 2014) — Larry Fink has urged CIOs of pension funds to consider the impact of rising longevity as one of their key concerns for 2014.

In a wide-ranging speech in Edinburgh, UK, at the National Association of Pension Funds’ Investment Conference—sporting a BlackRock tartan tie for the occasion—the CEO of the world’s largest asset manager laid down a number of core questions he would be asking himself were he a pension CIO—and longevity was at the top of his list.

“I’d be asking ‘Have I adequately considered the impact of longevity on my liabilities?’” he said. “I was speaking in the US recently and asked this question; the chair of a large US pension fund said he’d just finished a review and concluded that their duration was too short. So now they’re going to take a writedown, extended their liabilities, and are reviewing their assets.”

Much of Fink’s speech was taken up with his concern that pension funds around the world were not taking longevity risk seriously enough.

Fink also advocated for the UK and the US to move to a compulsory saving model, as adopted in Australia, to help increase savings. He also berated the “far too many” defined benefit schemes he saw with “20%-30% in cash and 10%-20% in short bonds—how will that help individuals? They won’t earn enough”.

Fink also stressed the need for CIOs to ask how their assets would perform relative to liabilities under different scenarios, and whether they were getting good value in relation to their assets.

Looking at asset management more broadly, Fink claimed the way that pension funds would consider emerging markets in future would fundamentally change.

“[Emerging markets have] good examples, and some real garbage,” he said. “The future of investing in emerging markets will change: I believe we’ll see much more granularity and we’ll stop talking about emerging markets as an asset class.”

Fink went on to warn that pension fund managers would need to take a much bolder approach and have a greater willingness to look at alternatives, hedge funds, and more esoteric bonds.

Finally, CIOs should continue to refine the mix of active and index-driven strategies, and working our which strategies are best served by which approach.