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Institutional investors the world over are increasingly examining the extent to which they invest in the defence sector as issues around national security move to the centre stage. The prospect of compelling returns, as European countries like Germany and Poland crank up defence spending, is also leading investors to look again at a sector set to account for a much larger slice of the index in coming years.

For some, like Finland’s €63 billion ($73 billion) pension insurer Ilmarinen, investing in defence sits relatively comfortably with its stakeholders who share a long border with Russia, which invaded Ukraine nearly four years ago.

But for others, putting more capital to work in defence and investing “in things that kill people” remains a highly complex conversation and made for one of the compelling panel sessions at the Fiduciary Investors Symposium Oxford.

Last year, Ilmarinen changed its ESG policies to enable investment in the controversial weapons sectors of NATO countries. The new policy facilitates the consideration of investment in companies that have revenue linked to controversial weapons, excluding biological and chemical weapons, and comes with violation screens and a due diligence process.

“Previously, we allowed investments in conventional weapons and dual use, but we had a zero limit on investing in companies with any revenue linked to controversial weapons – so all companies with any involvement in controversial weapons were excluded,” said Karoliina Lindroos, head of responsible investments, Ilmarinen Mutual Pension, speaking at the conference.

The old strategy ruled out investment in technology companies and airlines, not just pure play defence companies and the need for a rethink came when Russia invaded Ukraine, she continued.

“We considered the need for credible defence in Europe, and also foresaw that many companies would start to have more business linkages with defence and security. We thought that this type of binary policy may not serve us as well as it served us in the past, and we needed more nuance. In practice, companies operating in other sectors such as remote sensing or communications are now building use cases and linkages to defence and security. These types of transformation, where different technology companies integrate into the defence ecosystem, is changing the sector,” she said.

As the investment sector expands, defence is likely to become a larger part of the MSCI.

That’s something that KLP, the Norwegian passive investor with a keen ESG focus is well prepared to navigate through an established policy shaped around exclusions and in-depth due diligence.

Karolina Malisauskaite, analyst at KLP, explained how the investor screens out companies at risk of human rights violations in a strategy that has recently led to a series of exclusions of corporates supplying goods to Israel that have breached humanitarian law in Gaza.

But she said screening out companies is complicated because it is up to governments whether they license exports to countries in active conflict.

KLP has a nuanced approach to nuclear investment whereby it doesn’t exclude all companies that have a tie to nuclear weapons. Rather, it ascertains how central the company’s contribution is to the production and maintenance of nuclear weaponry.

And when the investor excludes a defence company, it typically re-invests into the same sector by overweighting other companies in aerospace or industrial and machinery sectors, natural candidates to provide to the defence sector.

Change the framing

Pension funds further away from Europe’s front line are typically a few steps behind in their thinking.

Richard Tomlinson, chief investment officer of LPPI, said only now are the investment team at the LGPS pool beginning to have important conversations about investing in defence. “The world is very different now and that does mean you need to change the way you frame things.”

The conversation has revealed the different levels of knowledge and dispersion of opinions amongst stakeholders, and the need for trustee boards to engage on the issue. Government leadership, alongside an honest debate about the size of the threat and the need for capital, would also help.

“Getting stakeholder cohesion is very difficult and requires a clear policy process,” he said.

Investors also reflected on the many different strands of the defence industry, and how the opportunity set is changing. Companies don’t just make missiles; the sector encompasses innovation and technology spanning AI, autonomous vehicles and drones so that a blanket exclusion would reduce the investment universe. Moreover, in the UK, defence is now a major part of an industrial strategy.

Elsewhere, index stalwarts like Airbus, Rolls-Royce Group, BAE Systems and Thales, to name a few, have many other consumer-related seams to their businesses.

Cybersecurity is also a vital seam to national security as hybrid warfare grows. And for some investors, investing in defence is the D (democracy) of ESG, and should be part and parcel of contributing to a world worth living in.

Produced in partnership with T. Rowe Price

When global asset owners gathered at London’s historic Rosewood Hotel to gage market sentiment and explore investment strategies and ideas, the tone was remarkably upbeat in a conversation that spanned currency strategies, the muted impact of geopolitics on asset prices, and the importance of managing human bias.

It would be easy to believe today’s fraught geopolitics, shifting long-term themes and all the uncertainty inherent in the AI boom would mean investors are overwhelmingly cautious. But during a roundtable hosted by Top1000funds.com in partnership with T. Rowe Price the majority of attendees voiced cautious optimism for investment returns ahead.

Like Sébastian Page, chief investment officer and head of global multi-asset at T. Rowe Price who described his view of the US market as both optimistic and speculative. Sure, property prices are falling, household debt is mounting, and unemployment is up 90 basis points. Moreover, there has been no time in US history when unemployment has risen by this much and the country hasn’t slipped into a recession.

Yet he said looking through an optimistic lens, the Fed is cutting rates creating fiscal stimulus, corporate earnings are growing at around 12 per cent per annum, consumer spending is strong, and AI capex spending is expected to increase a further 80 per cent. This all supports rising GDP.

Inflation, over the last few months, has been about 3 per cent so, if the US is running at 6.3 per cent nominal growth, that is higher than any year between the GFC and Covid

In the same vein, Anna Stupnytska, head of long-term investment strategy at the £55 billion ($73.8 billion) UK workplace pension scheme, Nest, described the current investment climate as both “complicated” and “expensive,” but said she also remains positive about the US economy.

“The direction of monetary and fiscal policy is accommodating, and financial conditions are easing, so unless there is something else, like an external shock, this combination sets the scene for a really meaningful acceleration in the US,” she said.

For some, like John Greaves, director of total portfolio investments, at the £34 billion ($45.8 billion) UK defined benefit scheme Railpen the opportunity lies in assets with growth and inflation resilience – and by avoiding expensive tech stocks, even though they might offer higher, short-term returns.

“We need to earn around inflation plus 5 per cent over the long-term for our plans that are open to new members, and you can get 2 to 3 per cent real returns from UK government bonds now, so it’s not so hard to find quality assets to do that in a baseline or upside scenario,” he reflected, adding that he sees “a lot of value” in the market outside technology, and “no need to chase assets.”

That’s not to say he doesn’t have an eye on the portfolio’s vulnerabilities. “An investment strategy might broadly deliver on its objectives 90 per cent of the time but it’s that 10 per cent where there might be meaningful shortfalls and [we’re] thinking about what that looks like,” he said.

Nor do seasoned investors believe the AI financing boom is necessarily about to turn to bust. John Normand, head of investment strategy at the A$387 billion ($255.7 billion) defined contribution fund AustralianSuper voiced concerns that what started out as a “great idea and wonderful investment theme” could become “overcooked” due to the possibility of overly loose monetary policy under the incoming Federal Reserve chair.

“My fear is that this could all end in tears at some point in the distant future and it’s probably going to have, as its roots, a typical thematic that attracts investors, and monetary policy that is inappropriate for the supply side of the economy,” he said.

Still, he’s not making any moves to de-risk just yet.

“It is possible markets are about half-way into an AI bubble, but not as far as two-thirds of the way in,” he reflected. “If I thought it was two-thirds, I wouldn’t want exposure to the AI theme in a variety of ways including being reasonably overweight equities in general because it wouldn’t be possible for that AI bubble to deflate without taking down stocks broadly,” he said.

Still, he’s not making any moves to de-risk just yet.

Geopolitics isn’t impacting asset prices as much as we think

In another argument for optimism, geopolitical uncertainty is not necessarily negatively influencing asset prices. Witness the subdued impact of the Trump administration’s Liberation Day announcements and tariffs on imports to the US, T. Rowe Price’s Page said.

“If you fell into a deep sleep in February 2022 and woke up today, and I told you about everything that had happened since then including all the conflicts, inflation and tariffs, you’d probably be surprised to learn that the [US] market is up 45 per cent,” he said.

Like other investors Nest has an extensive scenario analysis that included undertaking a review of the impact of some of the key geopolitical risks on the portfolio over the next three-to-five years. The results were similarly unexpected, said Stupnytska.

“The world is very different today so the approach that we’re taking is to look at different scenarios, and one of the risks that is very difficult to assess is the changing geopolitical order and where it ultimately moves to.”

For other investors, analysis of the business cycle is another source of reassurance in what lies ahead.

Despite heightened volatility and market uncertainty, AustralianSuper’s Normand believes the business cycle remains near trend.

“The negatives in terms of tariffs are being neutralised by positives such as fiscal stimulus and Fed easing,” he said. “It creates winners and losers, and inter-quarter volatility, but when I analyse the wide range of issues, I try to reduce it to whether any of it is going to fundamentally affect the pace of the business cycle.”

The findings, he said, don’t flag any reason for alarm just yet, and even if growth shifts down a gear for a quarter, he won’t be unduly concerned.

“I don’t see all these issues as all that destabilising for the trend rate of growth of the economy,” he said, with one cautionary note: the business cycle is also at the mercy of US policy makers, currently pulling on the levers that control labour supply. Nor is it clear if a potentially tighter labour market can be offset by long-term productivity gains from AI.

Concerns that the US jobs market could trigger economic woes down the line was also flagged by other investors in the room.

It’s one reason why Mike Liu, head of markets and research at Coal Pension Trustees Services which oversees around £20 billion ($26 billion) in assets on behalf of beneficiaries in two schemes from the UK’s legacy coal industry, is seeking to diversify away from the US in a contrarian view.

Any nominal [increase in] stimulus might translate into higher inflation than real economic growth, making it a possibility that growth may dip below 2 per cent next year,

Liu is not concerned about the US nominal GDP growth, which is higher than most European countries, but he is worried about the amount of fiscal stimulus amid near zero growth in US labour supply.

“Any nominal [increase in] stimulus might translate into higher inflation than real economic growth, making it a possibility that growth may dip below 2 per cent next year,” he said. “At the same time, you’ve got inflation at around 3 per cent. Above-target inflation and below-potential growth is not a very good environment for investments and that’s the risk.”

Strategies in the current climate

Investors are positioning their portfolios in a variety of ways in response to today’s opportunities. For some, currency strategies have edged front of mind.

For example, Alex Shaw, managing director, trading, at the C$731.7 billion ($524.4 billion) CPP Investments explained that the fund’s foreign exchange and currency management strategy has changed in recent years in pursuit of greater diversification benefits and higher risk-adjusted returns.

From zero hedging four years ago, the group, which has 88 per cent assets invested outside Canada, currently hedges around 20 per cent of its portfolio. “Where FX risk is uncompensated, we can take more equity risk by hedging it, and we believe 20 per cent is the optimal level for us.” Shaw said.

Australia’s third largest superannuation fund, Aware Super, is also rethinking its position on currency hedging, particularly as the fund invests more offshore, said Damien Webb, deputy chief investment officer.

“When markets fall, the Aussie dollar tends to fall so being unhedged is usually a low-cost buffer because you get returns in an unhedged way, but that hasn’t always been the case recently,” he said.

Elsewhere, Railpen has also recently increased its currency hedging, and now has about a third non-sterling FX risk for the schemes that are open to new members. “By being really clear and aligned on our horizon, we actually got comfortable with the idea of increasing our currency hedging a little,” said Greaves.

But he explained that the strategy depends on the different mandates of the funds under Railpen’s umbrella. Ultimately, decisions on portfolio construction, including currency hedging, come back to purpose, objectives and timeframes of the underlying fund, he said.

“We just completed a piece of work to get really aligned on our mandate and the time horizon for constructing and managing the investments because we were having a lot of discussions about things like commodities and currency hedging and it kept coming back to the mandate,” he said. “Some have a reference portfolio, some have an absolute return objective, and some have peer group benchmarking, I think that context is very important to answer a lot of these portfolio construction questions because obviously, if you have a shorter-term horizon, or need to be benchmark-aware, you approach some of these things differently.”

T. Rowe Price is bearish on the US dollar but does not run active overlays on its equity portfolios. Its views on currency are expressed through its fixed income portfolio, explained Page. “We have active overlays as a source of alpha within fixed income portfolios and at the asset allocation level, it’s more macro.”

As for other T. Rowe Price strategies, looking six-to-12 months ahead Page said the firm has a neutral position on stocks and bonds. “The fundamentals are fine, if not good, but valuations are elevated, which ends up neutral,” he said. “We’re short duration and positioned for inflation to go higher than expectations. We’re also long diversification – for example, we have overweight positions in international value stocks.”

In contrast, other investors are deliberately avoiding short, and even longer term, macroeconomic factors in their decision making. Like John Dewey, chief investment officer at the £20 billion West Yorkshire Pension Fund. In the absence of a high degree of conviction either way on how markets might act in the future, he is wholly focused on the job of paying long term pensions.

“I have a very broad portfolio of assets and when I look at things like credit spreads and risk-free rates today, I feel there are much easier decisions for me to make than [analysing] short-term or even longer-term macroeconomic factors,” he said.

“We have sterling liabilities, and we pay our members sterling payments long into the future. We can get UK-government backed cashflow at around 5.5 per cent yield and 2.5 per cent real yield, and when I look at US non-financial credit spreads, they haven’t been this low for decades. I weigh portfolio decisions in proportion to my conviction and at the moment, I have very low conviction.”

Cindy Chan, head of first-line investment risk at the £31 billion ($41.7 billion) Pension Protection Fund, the lifeboat fund that protects the pensions of eligible DB schemes when sponsors become insolvent, described global markets as “uncertain and tricky.”

But she said the PPF is better positioned now to navigate uncertainty ahead following a 2023 decision to decouple the PPF’s liability hedging assets from the non-hedging assets. Effectively creating two portfolios has helped decision making, said Chan.

“We also have a separate growth portfolio with a certain target return and risk budget. Having two portfolios with different objectives and different time horizons has made it easier to focus our investment decisions. The growth portfolio is structured to focus on delivering the long-term return that we want to generate and we’re able to make the right decisions for the right time horizon, which is very important.”

Tools for success

Repeatable processes and focused decision-making both sit high on the list of investment priorities in the current market.

For Page, a wariness of human bias in the way subjects are presented should also feed into decision making. “Every idea we might have on growth, on speculation, on whether markets are expensive or cheap can be presented in a way that’s framed to make a point. Every time you look at the financial media or politics or marketing, you’re looking at a certain amount of framing.”

Investors should ignore any urge to keep their money in cash – albeit that’s not really a possibility for the likes of Australia’s DC funds, subject to an annual performance test and peer comparison and typically fully or as close to fully invested at all times.

Page recalled a situation in April, when markets had plunged 20 per cent and recession forecasts jumped 66 per cent and a retail investor on one of T. Rowe Price’s webinars asked if he should sell everything and hold cash, given he was just five years off retirement.

“I said, don’t do that because while there are retail investors who have successfully bought a dip, there are more who have panicked and sold at the wrong time,” he said. “I always say, stay invested, stay diversified.”

Moreover, de-risking or seeking protection can come at the expense of missing out on the opportunities. When markets trade at record highs, there is a natural tendency for investors to focus heavily on downside protection yet “tectonic shifts” are creating opportunities, said Aware Super’s Webb, pointing again to AI.

“There are some really big things pulling us in a range of different directions and, to be frank, it is hard to know which way to break at this point. But our job is to stay in the market,” he said. “The asset managers that I consider leaders aren’t sitting in their bunkers, they’re out there making significant plays because they fundamentally believe that this is the big moment, almost like after the GFC, so while it’s a tricky time, there are a lot of opportunities and we’re certainly making sure that we stay invested.”

Other tools for success include using incentives to push staff to put total portfolio performance before individual asset class returns and leadership strategies that incorporate sports psychology whereby tweaks in the quest to go further or faster constantly add to, and fine tune a process.

The final ingredient for investors in the current climate? A good dose of luck.

The interplay between luck and skill is one of Scott Keller, chief executive officer, T. Rowe Price International’s favourite interview questions. Enthusiastic applications vying to join his 1000-plus team frequently overegg their skills, but luck also plays a vital role in success.

“I believe investment is a repeatable process: you need to do your research and do everything you are supposed to do,” he said. “But you need a little bit of luck too.”

Europe has been shaken by three shocks in the shape of three presidents – Putin, Xi and Trump, said Timothy Garton Ash, Isaiah Berlin Professorial Fellow and Professor of European Studies at the University of Oxford.

In the decades after WW2, Europe was reconstructed, created a European Community and had a solid security guarantee from the US under the NATO umbrella. It also steadily expanded.

Between 1989 to 2007, in a series of extraordinary achievements after the fall of the Soviet Union, former communist European countries transitioned to market economies and liberal democracies. Standout stories include Poland (now a trillion-dollar economy), the Czech Republic, and the Baltic states, which did not exist on the political map of Europe in 1989 and are now flourishing democracies and part of the EU and NATO.

“In Eastern Europe, the joke at the time was we know that you can turn an aquarium into fish soup, but can you turn fish soup back into an aquarium? And we did. In all these countries, we turned fish soup back into an aquarium. Some pretty odd aquariums, I grant you, as you look across post-Soviet Europe, but [aquariums] nonetheless,” Garton Ash said at the Fiduciary Investors Symposium at Oxford University.

The European Community became the European Union and rolled out huge projects like the euro, Schengen free movement and ongoing enlargement.

But a turning point came in 2008, at the beginning of the GFC, when Vladimir Putin seized two chunks of Georgia by force, beginning a cascade of crises. The GFC segued into recession and the Eurozone crisis; Putin conducted military seizures in Crimea that led to a full-scale invasion of Ukraine that continues today. Meanwhile, Europe continues to reel from a refugee crisis, Brexit, and a surge of support for populists.

“Now, shockingly, we are well into the fourth year of a major interstate land war in Europe, which has cost at least one million killed and wounded and untold suffering,” he said.

The Russian shock

Putin is a story of the Empire Strikes Back: it’s what declining empires do, said Garton Ash.

What was exceptional was that the Soviet empire, softly and suddenly vanished away in just three years between 1989 and 1991 with hardly a shot fired in anger. In historical terms, Russia’s invasion of Georgia, Crimea and Ukraine was predictable.

“Our mistake was not to be prepared for it when it happened,” he said. “There is still tremendous energy behind Putin and Russia’s effort to recover as much as possible of its empire and sphere of influence.”

And although Europe is waging war with Russia, most of the rest of the world has been quite happy to go on having good relations with Russia. Not just China, but India, Turkey, Brazil and South Africa. “All of them continue to see Russia as an entirely acceptable partner in a transactional great power world. Russia remains either an ally or a necessary partner, and you can see that in the diplomacy.”

What’s more, these powers have sufficient wealth and power to counterbalance the West. In 2024, the BRICS, measured at purchasing power parity, have economies $10 trillion larger than the G7. For the first time in well over 200 years, there’s sufficient wealth and power outside the West.

“We’re in a post-Western world,” he said.

The Trump effect

The election of President Trump has resulted in the crumbling of the West as a single coherent geopolitical actor. Trump has accelerated a long-term trend already underway, which questions about whether a stronger, more united Europe is in the interests of the US, given its pivot to Asia and focus on nation-building at home.

“We can no longer rely in the way we did for all those years on the US security guarantee,” said Garton Ash, arguing that the cooling relationship today is no different to historical periods when the US has withdrawn from Europe and been indifferent to Europe.

What the future holds

Garton Ash said the future of Europe rests on a number of key issues, amongst which the most important is the outcome of the war in Ukraine.

But the war won’t be decided in a single moment, rather via a process over a number of years. It depends on Ukraine, with the help of Europe, building up sufficient power to deter Putin or any likely successor. It will also depend on the extent to which the economy has been reconstructed and if young Ukrainians return to the country.

Success will also depend on the extent to which democracy has been integrated, and if Ukraine is on a path to membership in the European Union.

“The fact that Ukraine has been accepted as a candidate for membership, remarkable in itself, means nothing at all. Turkey has been a candidate since 1999.”

However, if these criteria are met, he said it is possible to say Ukraine has effectively won despite the huge loss of territory. But he warned against another future where Russia is seriously tempted to have another go because the deterrence is not credible enough.

Europe’s future also depends on the continent building up its defence sector.

Encouragingly, European countries (apart from Spain) are beginning the process but the industry is still fragmented and there will still be a minimum of European security that can only come from the US, like top-level intelligence, and extended nuclear deterrence.

Mario Draghi’s celebrated 400-page report, commissioned by the European Commission to provide a roadmap out of the continent’s ills, also needs implementing.

The EU is a slow-moving animal, and so far only 11 per cent of recommendations have been implemented.

Success will rest on Germany – a country that flourished on the back of exporting to China – cheap energy (from Russia) and security (from the US) driving the changes Draghi lays out.

“In a sense, Germany is right at the heart of this sense of crisis, but at the same time that gives Germany the incentive to be the driver of change.”

Other factors that will impact Europe’s future include the success or failure of the UK outside Europe. The continent must also solve cultural and economic discontent, and integrate essential policies like affordable housing. Failure to do so will open the door to populists in the swathe of elections due across the continent in the next five years.

But Garton Ash said “there is an argument” for having populists win elections to get them off the sidelines. Their political fortunes in Hungary and the Netherlands show that populists aren’t very good at governing either.

The US has been an unparalleled driver of portfolio returns for decades, but investors are increasingly concerned that US-dominant portfolios are jeopardising precious diversification.

Like Canada’s C$86 billion ($61 billion) Investment Management Corporation of Ontario (IMCO), which recently reassessed how it will approach the US, placing a 50 per cent portfolio limit on the allocation for the first time even although US treasuries and dollar investments have been a great diversifier, and America’s public and private markets have produced stella returns.

IMCO’s new target is close to where the allocation currently sits, so the reduction will only be marginal, explains Rossitsa Stoyanova, chief investment officer of IMCO, speaking during a panel session at the Fiduciary Investors Symposium. The strategy, she adds, isn’t a consequence of IMCO believing the US is poised to underperform in the future but is driven by diversification.

“We think we’re too exposed to the US, and we think there’s a risk of the US dollar and US treasuries not being the source of diversification they used to be,” she told the symposium at Oxford University.

She said strategy at IMCO will focus on investing more in Canada, and in private markets IMCO is looking at opportunities in Europe and the UK where external managers are starting to bring more co-investment opportunities.

Fredrik Willumsen, global head of strategy research at Norges Bank Investment Management (NBIM) said the giant oil fund has an overweight to European equities compared to a market-cap-weighted equity benchmark in a strategy that has been in place for decades.

In recent years, this underweight to the US has contributed to “a very, very meaningful underperformance” to the market-cap-weighted alternative as returns and earnings growth for US companies have outstripped European companies.

In 2021, Norway appointed a Government Commission to look at how the next 20 years could be very different from the past 20 years when it comes to the fund’s returns, he explained. Now, a new expert group appointed by the Ministry of Finance is looking to see the extent to which geopolitics should have an impact on NBIM’s investment strategy, and will publish its first findings in January.

Willumsen said that the fund uses a large share of its active risk on real estate and renewable infrastructure, and hopes to reap benefits from that. Historically, external manager strategies in listed equities in emerging markets have also proved profitable investments for the fund.

“We have had a phenomenal performance from the managers that we have chosen in emerging markets,” he said.

Currency conundrum

At the UK’s £76.8 billion ($100 billion) Universities Superannuation Scheme (USS) strategy is focused on scenario analysis that highlights inflection points in energy, technology and geopolitics.

For example, USS explores how President Trump’s policies might impact capital flows and the global trade system, and how AI will reshape productivity growth and markets. Another analysis is exploring to what extent AI will lead to very concentrated gains where the key stakeholders are the primary winners, or if the technology creates winners across sectors.

Mirko Cardinale, head of investment strategy at USS said that scenario analysis is a powerful tool to try and navigate complexity and something the investor has used before when it worked with the University of Exeter to build narratives and a framework around the energy transition.

The current investment climate has led the investment team to think about its exposure to currencies and dollar assets. USS, like IMCO, has a large exposure to growth assets. The investor also manages liability risks through a hedging programme with a top-down currency programme.

“We think currencies should be looked at in the context of the overall portfolio,” said Cardinale, detailing a strategy that involves exploring the interaction between foreign currency exposures, equities and growth assets.

He explained that sterling tends to fall at times of market stress, which means foreign currency is a useful diversifier. The US dollar has been an important source of diversification and has historically behaved as a very safe currency. But now that could change.

“We are taking the view that the defensive property of the dollar will be slightly less than it used to be.”

USS has reduced its dollar exposure in favour of other currencies with defensive properties including the euro, the Swiss franc and the yen.

In another approach, the investor is also considering trimming some of its US duration exposure, and titling the allocation to the UK instead.

However, USS’s allocation to inflation via US TIPS remains very attractive because of the impact of tariffs on inflation. Similarly, IMCO is also exploring the benefits of moving some of the allocation to US treasuries into allocations offering more diversification and inflation protection in assets like commodities or gold.

Investors reflected on the importance of diversification between fast-growing companies and companies with more stable cash flows. European stalwarts like Nestle and Diageo are not overvalued, and these types of companies also hold up reasonably well in volatile times.

But they questioned if a non-US dominant portfolio would be able to achieve the same resilience and innovation that investors have historically found in US markets. They said it is difficult to reallocate to innovative companies in China, and Europe needs to reform to become a more compelling destination for capital, including simplifying the listing rules.

Ensuring a sustainable income in retirement is an enduringly knotty problem and one that continues to preoccupy national pension systems and their asset manager partners the world over. At the Fiduciary Investors Symposium Oxford, panellists explored how different countries are innovating to ensure their pension systems’ sustainability.

Like NEST, the UK’s biggest defined contribution (DC) master trust, which plans to enter the bulk annuity market as part of a new, post-retirement solution and is about to partner with an insurance provider to provide longevity protection for older retirees.

“We’re in the final stages with two insurance companies that will co-design a deferred annuity product,” said Mark Fawcett, chief executive officer of NEST Invest, who articulated the challenge many savers face in balancing the financial needs of retirement.

“It’s just really hard to make sure that you don’t run out of money before you die or leave a big pile of money on the table when you could have had a better lifestyle in retirement,” he said.

The annuity will pay out a level income from 85 for the rest of a person’s life, “whether they live to 86 or 106,” said Fawcett. NEST’s strategy is a default option, but requires member engagement because the annuity is not fully redeemable if they change their mind.

Majdi Chammas, head of procurement and product strategy at the Swedish Pension Fund Agency, explained the role the agency plays in selecting, managing, and monitoring the investment funds offered to Swedish savers under the Premium Pension. It is a part of the national pension system where individuals can choose how their savings are invested.

It has replaced an open fund marketplace, which once allowed hundreds of funds, with a curated, quality-controlled platform.

Specialised life insurance group Athora, part of US asset manager Apollo, recently bought UK insurer Pension Insurance Corporation (PIC) in its latest growth surge. The alternatives manager saw an opportunity to enter the retirement savings market in the US after the GFC and is now finding rich pickings in Europe too.

“We had the view that there was a demographic trend that would require significant demand for products that could give people guaranteed income and the innovation on products to allow people to plan better for retirement. We didn’t see an insurance company having the asset management capabilities to provide those products,” said Alex Humphreys, partner at Apollo Global Management.

He argued that buyout options support corporates de-risk, and help provide guaranteed income to pensioners and retirees through diversifying from the public markets and using, predominantly, investment-grade private credit to generate spread over the cost of funds.

“We’re the number one annuity provider in the US today,” he said. “At the heart of it, it’s still all about being a spread business, providing attractive products to policyholders and generating a spread through diversifying away from the public markets. There’s £1.2 trillion of defined benefit schemes in the UK today. About £50- £60 billion of those go to buyouts every year, so it’s a huge addressable market.”

Panellists reflected that during the accumulation stage, people should be less focused on liquidity and prepared to tie their money up longer term. Beneficiaries also need a diversity of asset classes that should include private markets like infrastructure and other assets that are tied to inflation and throw off income.

Sustainable pensions require savers tapping into the “full economy” – even more important today in thinning public markets. Innovative products that give people a breadth of access to a broader range of asset classes could include drawdown funds, semi-liquid funds, or more ETF-type strategies, for example, said Humphreys.

Successful pension systems also need to balance conflicting goals like a stable income for life and capital preservation with long-term growth, low costs, and the flexibility to allow members to change course.

Fawcett said that NEST is cash-flow positive because it takes in £6 billion in contributions every year. It has allowed the investor to create an internal market for its private market holdings, whereby when liquidity is required for older members, there are always new people coming up to take on the assets.

Panellists concluded with reflections on the challenge of communicating about pensions.

“Pensions aren’t that interesting to most people, right? They spend more time planning their holiday than thinking about that,” said Fawcett.