The new liquidity landscape: Why integrated solutions are optimal for pension funds
09 June 2026
CACEIS’s Olivier Zemb, head of Equity Finance and Collateral Management, Joanna Ksenzova, senior Market Services sales, and Rémy Ferraretto, head of Íø±¬³Ô¹Ï Finance & Repo Sales, explore why a proactive, integrated approach to financing and liquidity, delivered through the custodian, is critical for resilience and performance
Image: stock.adobe.com/mreco
For European pension fund managers, liquidity is no longer a mere operational consideration — it is a strategic requirement.
The combination of structural pension reforms, accelerated settlement cycles like T+1, and volatile markets has created a complex landscape. Funds are grappling with heightened liquidity risk, increased collateral demands, and unprecedented operational complexity.
In this environment, relying on fragmented, ad-hoc solutions exposes funds to unnecessary cost, risk, and administrative burden.
The three-fold challenge: Liquidity, collateral,
and operations
Following active industry discussion on the current trends for pension funds across Europe, Zemb suggests that these are driven by three interconnected factors: increased liquidity risk, higher collateral requirements, and growing operational complexity. While the Dutch Future Pensions Act (Wtp) is a potent example, similar pressures from regulatory shifts, liability-driven investing, and the need for greater efficiency are felt UK-wide and across the continent.
Managing increased liquidity risk
Liquidity risk arises primarily from volatile cashflows. Effective management requires accurate forecasting, stress testing, and holding sufficient high-quality liquid assets (HQLAs). Without adequate buffers, funds may be forced into distressed sales. The optimal solution could be engaging in repo, particularly evergreen transactions, to improve portfolio efficiency without raising market risk.
Pension funds across Europe face liquidity pressure from more frequent portfolio rebalancing, monthly inflow from defined contribution pension plans, benefit payments, and the macroeconomic need for agile cash management. Furthermore, the imminent move to T+1 settlement in global markets will compress timelines dramatically, increasing intraday funding needs and the risk of settlement fails. Accurate, real-time liquidity forecasting becomes non-negotiable.
Addressing higher collateral requirements
The solutions for liquidity risk, in turn, trigger higher collateral requirements. Funds may face issues with the availability of collateral, both in quantity and quality. Rather than holding HQLAs as a static buffer, entering into collateral transformation transactions via securities lending could yield better outcomes. This preserves growth on primary investments and reduces the opportunity cost of holding idle HQLAs.
The hidden burden: Operational complexity
Portfolio management is becoming multi-dimensional, employing multiple individual portfolios or lifecycle strategies. This requires more calculations, margin calls, and complex reporting, significantly increasing the operational burden. This may be the most significant challenge faced and one that is not obvious at the outset. When looking for solutions, pension funds will identify that outsourcing certain operational activities could be a cost-effective solution. Collateral management alone involves multiple cumbersome, costly tasks with low added value when performed in-house. However, while this may be manageable for a single portfolio, in a modern context with multiple accounts and strategies, it becomes a major operational burden. Today, many pension funds are already working with a service provider that leverages economies of scale to perform tasks more efficiently and which can offer industrial solutions that can ease the operational burden they face.
The custodian’s role in providing integrated solutions
Ksenzova explains that custodians offer many of the above-mentioned solutions and are in a strong position to optimise costs and implement solutions that raise the efficiency of administratively intensive processes. They can provide clients with repo, securities lending, asset switches, collateral transformation, and other related solutions, all of them including efficient middle and back office services. However, using such products on a stand-alone basis does not enable the funds to benefit from the full efficiency gains of a more integrated service package. To identify the optimal servicing package for efficient operations, it is essential that the custodian and fund manager work closely together to analyse and define the portfolio’s requirements, while staying compliant with the portfolio guidelines. This involves stress-testing scenarios using performant technology platforms and is a key step that while essential is neither costly nor time consuming. Innovative collateral optimisation platforms can help funds define the most efficient asset allocation strategy, with in-depth stress-testing analyses that verify both the liquidity situation and collateral availability. There are a number of leading FinTech innovators that offer these high-performing collateral optimisation software solutions on a stand-alone basis but some custodians, such as CACEIS, now work directly with FinTech partners to integrate the solutions into the processing chain, enabling greater efficiency and more transparent, unified reporting.
Under the current EU shift to DC pension plans, and evolving investment requirements, assets must be rebalanced dynamically, which can lead to a shift from large pools of government bonds to other assets, with lower HQLA buffers available. In such an environment, rapid access to well-tested, integrated liquidity solutions becomes essential.
Key considerations for integrated liquidity management
Various factors should be considered when defining a package of integrated solutions:
• Market liquidity squeeze: In a stress scenario, when the entire market is looking for liquidity, it may be very challenging to cover needs. To prepare, using a varied selection of tools, multiple sources and multiple counterparties, is key. Custodians, with their neutral role and diversified client base, should be included in the range of options as their impact from direct market activities is more limited.
• Counterparty quality: Assessing the quality of counterparties becomes even more critical when liquidity risk is on the rise. As a neutral counterparty with a core business focus on safekeeping and risk management, the custodian brings additional benefits as a fund counterparty.
• Performance and cost efficiency: Funds need to be able to perform pricing comparisons and independent benchmarking.
• While committed credit lines and repo facilities can serve as a potential buffer, they can be costly and require careful analysis.
The enduring role of integrated securities lending
In addition to securities finance solutions for liquidity and collateral management, securities lending can make risk-weighted contributions to fund performance in terms of cost management and overall profitability. It can optimise performance by generating additional revenues on idle assets that can offset custody fees. Putting idle assets to work must be performed with prudential risk management and aligned with the fund’s ESG policy. Integration of securities lending with the fund’s overall strategy and alignment with repo and collateral management solutions is crucial. Returns generated by a programme depend on the portfolio’s risk profile, collateral matrix, and ESG approach, but can be optimised using a pre-agreed lending term or guaranteed revenue structures. While term or evergreen trades may be seen sometimes by portfolio managers to reduce flexibility, any provider should be able to offer solutions such as substituting issuers within the same quality bracket. Term trades with a counterparty holding a large asset pool do however offer significant flexibility and value for stable portfolios. Furthermore, guaranteed structures also provide access to lending at a fixed price for a pre-agreed period and can be beneficial for stable portfolios with a long-term investment strategy.
Conclusion: A strategic partnership for a more demanding era
Based on our experience and expectations for the coming months, Ferraretto stresses that the changing landscape for European pension funds is defined by a clear imperative: to do more with less. Less time, due to T+1. Less margin for error, due to volatile markets. Less operational bandwidth, due to increasingly complex strategies. The challenges of liquidity, collateral, and operational overhead are universal, though their triggers — be it the Dutch Wtp, UK regulatory pressures, or global settlement changes — may vary.
The path to resilience lies in integration and partnership. Siloed solutions for repo, collateral, or securities lending create gaps and inefficiencies. A holistic approach, combining these tools on a unified platform, allows funds to transform reactive cost centres into proactive performance levers. This strategy mitigates the risks of settlement fails and collateral shortfalls while optimising the use of every asset on the balance sheet.
In this context, the custodian evolves from a passive keeper of assets into an active, strategic partner. By leveraging neutrality, scale, and integrated technology, a custodian can provide the essential infrastructure for robust liquidity management. For pension fund managers across Europe, embracing this integrated model is not merely an operational upgrade — it is a strategic necessity to ensure settlement efficiency, safeguard member outcomes, and build durable portfolio resilience for the years ahead.
The combination of structural pension reforms, accelerated settlement cycles like T+1, and volatile markets has created a complex landscape. Funds are grappling with heightened liquidity risk, increased collateral demands, and unprecedented operational complexity.
In this environment, relying on fragmented, ad-hoc solutions exposes funds to unnecessary cost, risk, and administrative burden.
The three-fold challenge: Liquidity, collateral,
and operations
Following active industry discussion on the current trends for pension funds across Europe, Zemb suggests that these are driven by three interconnected factors: increased liquidity risk, higher collateral requirements, and growing operational complexity. While the Dutch Future Pensions Act (Wtp) is a potent example, similar pressures from regulatory shifts, liability-driven investing, and the need for greater efficiency are felt UK-wide and across the continent.
Managing increased liquidity risk
Liquidity risk arises primarily from volatile cashflows. Effective management requires accurate forecasting, stress testing, and holding sufficient high-quality liquid assets (HQLAs). Without adequate buffers, funds may be forced into distressed sales. The optimal solution could be engaging in repo, particularly evergreen transactions, to improve portfolio efficiency without raising market risk.
Pension funds across Europe face liquidity pressure from more frequent portfolio rebalancing, monthly inflow from defined contribution pension plans, benefit payments, and the macroeconomic need for agile cash management. Furthermore, the imminent move to T+1 settlement in global markets will compress timelines dramatically, increasing intraday funding needs and the risk of settlement fails. Accurate, real-time liquidity forecasting becomes non-negotiable.
Addressing higher collateral requirements
The solutions for liquidity risk, in turn, trigger higher collateral requirements. Funds may face issues with the availability of collateral, both in quantity and quality. Rather than holding HQLAs as a static buffer, entering into collateral transformation transactions via securities lending could yield better outcomes. This preserves growth on primary investments and reduces the opportunity cost of holding idle HQLAs.
The hidden burden: Operational complexity
Portfolio management is becoming multi-dimensional, employing multiple individual portfolios or lifecycle strategies. This requires more calculations, margin calls, and complex reporting, significantly increasing the operational burden. This may be the most significant challenge faced and one that is not obvious at the outset. When looking for solutions, pension funds will identify that outsourcing certain operational activities could be a cost-effective solution. Collateral management alone involves multiple cumbersome, costly tasks with low added value when performed in-house. However, while this may be manageable for a single portfolio, in a modern context with multiple accounts and strategies, it becomes a major operational burden. Today, many pension funds are already working with a service provider that leverages economies of scale to perform tasks more efficiently and which can offer industrial solutions that can ease the operational burden they face.
The custodian’s role in providing integrated solutions
Ksenzova explains that custodians offer many of the above-mentioned solutions and are in a strong position to optimise costs and implement solutions that raise the efficiency of administratively intensive processes. They can provide clients with repo, securities lending, asset switches, collateral transformation, and other related solutions, all of them including efficient middle and back office services. However, using such products on a stand-alone basis does not enable the funds to benefit from the full efficiency gains of a more integrated service package. To identify the optimal servicing package for efficient operations, it is essential that the custodian and fund manager work closely together to analyse and define the portfolio’s requirements, while staying compliant with the portfolio guidelines. This involves stress-testing scenarios using performant technology platforms and is a key step that while essential is neither costly nor time consuming. Innovative collateral optimisation platforms can help funds define the most efficient asset allocation strategy, with in-depth stress-testing analyses that verify both the liquidity situation and collateral availability. There are a number of leading FinTech innovators that offer these high-performing collateral optimisation software solutions on a stand-alone basis but some custodians, such as CACEIS, now work directly with FinTech partners to integrate the solutions into the processing chain, enabling greater efficiency and more transparent, unified reporting.
Under the current EU shift to DC pension plans, and evolving investment requirements, assets must be rebalanced dynamically, which can lead to a shift from large pools of government bonds to other assets, with lower HQLA buffers available. In such an environment, rapid access to well-tested, integrated liquidity solutions becomes essential.
Key considerations for integrated liquidity management
Various factors should be considered when defining a package of integrated solutions:
• Market liquidity squeeze: In a stress scenario, when the entire market is looking for liquidity, it may be very challenging to cover needs. To prepare, using a varied selection of tools, multiple sources and multiple counterparties, is key. Custodians, with their neutral role and diversified client base, should be included in the range of options as their impact from direct market activities is more limited.
• Counterparty quality: Assessing the quality of counterparties becomes even more critical when liquidity risk is on the rise. As a neutral counterparty with a core business focus on safekeeping and risk management, the custodian brings additional benefits as a fund counterparty.
• Performance and cost efficiency: Funds need to be able to perform pricing comparisons and independent benchmarking.
• While committed credit lines and repo facilities can serve as a potential buffer, they can be costly and require careful analysis.
The enduring role of integrated securities lending
In addition to securities finance solutions for liquidity and collateral management, securities lending can make risk-weighted contributions to fund performance in terms of cost management and overall profitability. It can optimise performance by generating additional revenues on idle assets that can offset custody fees. Putting idle assets to work must be performed with prudential risk management and aligned with the fund’s ESG policy. Integration of securities lending with the fund’s overall strategy and alignment with repo and collateral management solutions is crucial. Returns generated by a programme depend on the portfolio’s risk profile, collateral matrix, and ESG approach, but can be optimised using a pre-agreed lending term or guaranteed revenue structures. While term or evergreen trades may be seen sometimes by portfolio managers to reduce flexibility, any provider should be able to offer solutions such as substituting issuers within the same quality bracket. Term trades with a counterparty holding a large asset pool do however offer significant flexibility and value for stable portfolios. Furthermore, guaranteed structures also provide access to lending at a fixed price for a pre-agreed period and can be beneficial for stable portfolios with a long-term investment strategy.
Conclusion: A strategic partnership for a more demanding era
Based on our experience and expectations for the coming months, Ferraretto stresses that the changing landscape for European pension funds is defined by a clear imperative: to do more with less. Less time, due to T+1. Less margin for error, due to volatile markets. Less operational bandwidth, due to increasingly complex strategies. The challenges of liquidity, collateral, and operational overhead are universal, though their triggers — be it the Dutch Wtp, UK regulatory pressures, or global settlement changes — may vary.
The path to resilience lies in integration and partnership. Siloed solutions for repo, collateral, or securities lending create gaps and inefficiencies. A holistic approach, combining these tools on a unified platform, allows funds to transform reactive cost centres into proactive performance levers. This strategy mitigates the risks of settlement fails and collateral shortfalls while optimising the use of every asset on the balance sheet.
In this context, the custodian evolves from a passive keeper of assets into an active, strategic partner. By leveraging neutrality, scale, and integrated technology, a custodian can provide the essential infrastructure for robust liquidity management. For pension fund managers across Europe, embracing this integrated model is not merely an operational upgrade — it is a strategic necessity to ensure settlement efficiency, safeguard member outcomes, and build durable portfolio resilience for the years ahead.
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