Rising Appetite of Pension Funds to Crypto Markets
Rising Appetite of Pension Funds to Crypto Markets
The key players of financial markets, banks, are showing their growing interest in crypto markets via converting their investment functions to digital investment platforms or building their bodies as neobanks, a digital form of traditional banking activities. We had a look at this interest in our previous article. Now we have new visitors in crypto markets; pension funds.
Pension, or superannuation, funds are funded by periodic contributions by employees or employers. Pension plans themselves define mandates as to projected average rates of returns. Retirement savings in pension funds, pension insurance contracts, and in other vehicles exceeded the 50 trillion USD mark worldwide for the first time, with USD 49.2 trillion in the OECD area and USD 1.7 trillion in other reporting jurisdictions at the end of 2019. (OECD, 2020) Unfortunately, since 2006, most plans are missing investment mandates because of global financial crises or volatile markets. It has been observed by regulatory bodies that many private and public pension funds are significantly underfunded and requiring plan sponsors to add additional capital.
In pension fund management, there are two mainstreams; defined-benefit or defined-contribution. The fund management is performed commonly based on a defined-benefit scheme, which means that employees will receive pension payments equal to a certain percentage of their average salary paid throughout their last few years of employment. The key indicator of investment performance is being prudent and diversified. An emerging trend for assuring this rule is investing also in alternative investments; like private equities, hedge funds, commodities, derivatives, and high-yield bonds, for reaching higher returns. Crypto assets are classified as new members of this product group for fund management bodies and the size of investment allocations from pension funds are growing rapidly.
As of now, the interest of pension funds appears indirectly via fund management companies. The fund managements offer a number of crypto currency trusts and match investors’ exposures to the asset classes without holding crypto assets directly. Pension funds compensate this process with operational costs and they only decide their risk appetite and exposure thresholds for crypto assets. After seeing more pension funds in crypto currency area, fund management companies reduced their management fees for alluring more pension funds from different companies and countries as well. In 2021, we will see more players with different risk appetites and crypto assets investment schemes on the investment markets.
Low-interest rates are still forcing all financial institutions and crypto markets may be the key to escaping from this deadly area. We will touch on more points about this new standard in the following articles. For any further questions, please reach us via contact@cryptoindexseries.com or visit our CryptoIndexSeriesTM Platform for a better analysis of the crypto market space.
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