Suppliers gain from pension pain – an alternative approach to supply chain finance?
This week we’re delighted to welcome John Mardle as a guest writer. John delivers CashPerform’s working capital optimisation programme and brings a new perspective to the supply chain finance discussion.
The level of trade finance required today globally outstrips what can be achieved even by syndications that pull together all the banks. The pool is just not big enough in terms of the figures needed to support global trade. Could pension funds plug the gap?
Pension funds have lost significant value since the credit crunch in 2008. Final salary schemes have been being curtailed and they have suffered a battering from pension regulators and Government ‘raids’ on pension funding streams. They are also funding an aging population.
It’s no wonder that many pension funds are being run with huge deficits and their trustees are now looking at all avenues to reduce that deficit. Their traditional approach was to request regular cash injections from their company sponsors and although corporates were able to oblige because of their cash mountains, many smaller and medium sized businesses could not. Many pension funds across the world have been looking at how to achieve a good return on low risk investment.
However, pension funds are plagued by rules, bureaucracy and the initial approach of many schemes was to adopt ethical approaches by funding share acquisitions on the back of worthy causes. For example, by investing in corporate social responsibility programmes in the BRIC countries (Brazil, Russia, India and China). But these approaches soon fell foul of concerns surrounding sweat shops, slave labour, illegal mining, illegal logging as well as other regulatory issues. Could supply chain finance provide the alternative and safe investment approach for pension funds?
If one looks at trade, and what it takes to finance trade, the numbers are simply staggering. It exceeds the capabilities of all the banks in the world combined. Pension funds could plug the gap. Relying on bank syndications is fine in the short-term but not good enough in the long-term because it relies purely on the banking community for trade finance, and banks are limited in number and face other risks. Trade is growing at a fast pace, and for this to continue, we need to ensure that the provision of trade finance can capture external interest and also that we can do different financing structures.
The capital requirements imposed by Basel III’s may further restrict banks’ ability to provide trade finance and there is a need for new, non-bank investors, such as hedge funds or pension funds, to enter the market. For such investors, trade finance represents a viable new investment opportunity, meeting their risk and return requirements.
In the world of global trade finance, for banks to be the sole investors is far too restrictive. The investor base can be expanded to include pension funds, which require a good return with an appropriate risk profile.
Trade finance could be just the right product for pension schemes and not only because it is low risk and it is not without precedent. The Danish export credit agency EKF has insured a $1.7billion export loan provided by Denmark’s largest pension fund, PFA Pension to fund a large oil and gas project. This is the second time EKF has guaranteed such financing alongside funding of a similar amount in the last year. And Norway’s ECA Giek took a similar approach in guaranteeing the financing of a marine vessel in Vietnam by pension fund DNB Livsforsikring.
Pension funds should look at the company’s that fund them as well as their supply chains. What better way to support themselves and their ‘owners’ than to invest in struggling suppliers who are locally based, ethical, compliant with latest regulations and actually in need of cash to fund, say research and development, for the ultimate benefit of customers of the company that maintains the pension fund?
John can be found on twitter @JohnMardle