Pension funds and long-term investment

It is estimated that pension funds globally manage investments aggregating some $20,000 billion. In the United Kingdom, the figure is less than $2,000 billion, but pension funds are still major players in the sterling markets. How pension schemes are governed in terms of investment strategy can therefore be extremely important for the efficiency and structure of the global capital markets.

Pension funds have enjoyed the status of being the ultimate in long-term institutional investors (although in recent years certain sovereign wealth funds have acquired a potentially similar position). It can be argued that pension funds have the long-term strength to accept short-term risks, especially in the equity markets. However, the application of this approach has varied greatly over recent decades. Recently, mainly due to rising costs and tougher regulation, many corporate sponsors have begun to consider winding up their pension schemes or buying out part of their pension liabilities through transactions with insurance companies. Such measures emphasise the short rather than the long term.