Meeting the negative interest rate challenge (Sponsored)

Aon Ireland’s Head of Investment, Denis Lyons, explains how the firm is helping clients mitigate or even obviate the worst impacts of negative interest rates.

Corporates, insurance companies, charities, and other institutional investors that typically hold large amounts of funds on deposit have been particularly impacted by the low-interest-rate environment, which has prevailed for the past number of years. For many of these organisations, bank deposits represented the default option for cash holdings. They offered a high degree of security and something of a hedge against inflation.

That hasn’t been the case for quite some time, however. Things were bad enough when bank deposit interest rates hit zero, but they are now firmly in negative interest rate territory with banks effectively charging customers for looking after their money.
The traditional alternative to bank deposits, the bond market, isn’t much better. Short-dated Irish government bonds are regularly in negative yield territory, while that has been the case for German bonds for quite some time.

But where do these organisations turn? They need to put their cash somewhere, and negative interest rates can seriously impact their bottom line. In the case of a corporate, for example, a negative interest rate of 1% on a deposit of €10 million would cost €100,000 a year – not something many organisations can countenance.

Aon has developed a solution to this dilemma with its Atlas (Aon’s Treasury, Liquidity and Assets Service) offering. Atlas is a one-stop-shop investment solution that offers access to several low-risk funds and strategies. The aim is to enable clients to mitigate or even obviate completely the worst impacts of negative interest rates.

Atlas has its genesis in an offering developed by Aon to meet the investment needs of captive insurance companies, according to Aon Ireland’s Head of Investment, Denis Lyons. “These are the self-insurance subsidiaries of large corporates,” he explains. “They are restricted in how they can invest their capital, and we developed a solution to meet their needs last year. We have now adapted that to meet the needs of corporate cash investments and any type of institutional investor with short-term investment needs.”

The need for the Atlas platform has been increasing. “Up until last year, the banks had held off on charging corporate customers for putting money on deposit. But it was inevitable that they would pass on these costs as the ECB was already charging them,” Lyons notes. “We have found that a lot of companies are now being charged.”

These companies include organisations that may have deferred or cancelled investment and expansion decisions due to the COVID-19 pandemic and have seen significant amounts of cash accumulate in the business. “Negative interest rates can have a significant impact on those companies if they have large sums on deposit.”

The Atlas solution was developed last year by the Global Aon Insurance Investment team and uses a tailored investment platform provided by Goldman Sachs. It was a response to a clear demand from the captive insurance sector, according to Lyons. “They faced clear challenges in terms of their short-term investments, and bank deposits typically have a high capital charge compared to money market funds. The aim of the funds on the platform is to negate the impact of negative interest rates.”

The Atlas solution provides access to a range of funds and strategies that have gone through intensive research and due diligence by the Aon global investment management team before being admitted to the platform. Aon brings more than investment expertise and experience, however. It also brings scale. “That scale enables the team to negotiate favourable terms with the funds in terms of fees and provide access to funds that may not be available to smaller investment amounts,” Lyons points out.

The platform features a few different investment strategies. One is an extremely low-risk money market strategy. “This might give a return of minus 0.5% instead of minus 1%, which some corporates are now being charged to hold funds on deposit. You can achieve the ECB base rate return with money market funds in a much more diversified manner compared to investing in just one deposit institution. Short-dated bonds might get you back towards zero or even a positive return. If an organisation has a longer-term investment horizon for a portion of their funds and is happy to invest for three to five years, they can look towards slightly higher risk and higher return investments. It entirely depends on what the client wants to do. If their target is simply to get back to 0% and aim to negate negative interest rates, a short duration bond fund might be the best option. If they know they won’t need the cash for three to five years and are happy to take a bit more risk, they might be able to target a return of somewhere around the 2-4% per annum level.”

And there are other benefits. “Some of the funds on the platform have a specific environmental, social, and governance (ESG) focus. Many corporates will already have a corporate social responsibility policy in place, and having a strong ESG focus in their investments will align with that.”

Efficiency is another positive factor. “The investment platform makes it easy for companies and investors to access multiple funds,” Lyons points out. “There is just one account opening process and one anti-money laundering (AML) process. If you go to managers directly, you have to go through the whole process with each one. That’s very inefficient.”

The technology platform can also link into some treasury accounting platforms. “That’s of enormous benefit to treasury teams,” he adds.

And the platform offers multiple currency investments. “You can be a corporate treasury manager in Dublin but may have cash deposits in euro, dollar, sterling and other currencies. The platform enables you to amalgamate all these holdings with funds in different jurisdictions. That makes it very transparent and easy to manage for treasury managers.”

Demand for the platform is very strong. “We are seeing strong interest from existing Aon captive insurance clients who typically keep cash in bank deposits. We also see strong interest from the corporate sector. Market expectations are for negative rates to persist until at least 2026. Any organisation that places a large amount of money in cash deposits and is charged negative interest rates should consider the Atlas solution. Negative and very low interest rates will certainly not go away in the short-term.”