Pension fund managers have raised concerns over liquidity, with exposure to private credit being cited as one of the foremost reasons.

Nearly one in five (18 per cent) pension funds said they do not have enough liquidity to withstand adverse scenarios, according to a survey from pension fund risk and return consultancy Ortec Finance.

Over the last decade, pension funds have increased their investments in private assets to boost returns through the illiquidity premium, but now funds are reflecting on their potential liquidity risks.

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The study in the UK, US, the Netherlands, Canada and the Nordics with senior pension fund executives whose funds collectively manage $1.451trn (£1.2trn) in assets found that a further 62 per cent believed they had enough liquidity for most scenarios but admitted the situation could become problematic in extreme scenarios. Just 20 per cent said they have no liquidity concerns.

Around 60 per cent said it is the biggest risk faced by the funds they manage, while 25 per cent said short-term liquidity is the biggest risk. Only 15 per cent said the short and long-term risks are roughly equal.

The concern around exposure to private assets was particularly strong among defined benefit (DB) schemes. Of the managers questioned, 80 per cent reported that the risk of unfunded commitment poses a significant or slight risk to the DB pensions industry over the next three years.

Overall, a quarter of the managers believed unfunded commitments beyond the control of pension portfolio managers posed a significant risk, while 19 per cent said it was not a risk.

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Despite the presence of these liquidity concerns, more than half (58 per cent) said liquidity is already well-managed and 28 per cent said other risks are more pressing. Just 10 per cent said liquidity risk was front of mind, while four per cent said it was not a major concern.

“Our study highlights the liquidity issue that pension funds are facing, especially given the largely unpredictable nature of projecting unfunded commitment and capital calls,” said Ortec Finance managing director global pension risk Marnix Engels.

“To address this issue thoroughly, funds should focus on scenario modelling and stress testing. Scenario modelling of the capital calls and distributions or private assets can help funds understand what their liquidity constraints may be in the worst-case scenarios in the next five, 10, or 20 years.”

Independent research company PureProfile interviewed 100 senior pension fund executives across Europe and North America. The survey was conducted during November 2024.

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