EUROPE - The introduction of a uniform approach to pension regulation under the revised IORP Directive will only serve to increase volatility, according to Andreas Hilka, head of pensions at Allianz Global Investors (AGI).
Speaking at a conference in Munich yesterday, Hilka said he was “scared” of the impact of a homogeneous pensions market resulting from the introduction of the holistic balance sheet, one of the main changes currently being considered by the European Commission.
Hilka told attendees that volatility in capital markets would only increase if investors all attempted to “go out of the same small door”, noting that this would be the result of introducing a standardised model forcing pension funds to take a similar approach to investing.
“Pension funds in general are not that homogeneous - they have a lot in common, but they are not that homogeneous because they are dependent to some extent on their sponsor support,” he said.
“Luckily, we don’t have the homogeneous European pension funds yet - we don’t have a market for pensions, and I’m not sure regulation should require us to [set up] a harmonised pension market in Europe. I am sceptical, and I am scared.”
He later told IPE that smaller institutions would be reliant on a standard investment model, as they would not have the resources to design a tailor-made approach, serving only to unify investment behaviour.
“This will lead to an institutionalised demand in government or high-quality bonds, and this might trigger an inversion of the yield curve,” he said.
Hilka likened the predicted inversion to the British regulation in the 1990s requiring institutional investors to match their liabilities, an approach that led to a manipulation of the bond market.
He conceded that there was already a major fixed income bias in institutional portfolios, especially in Germany, but he said this demand would be “cemented” if similar investment regulations were applied across Europe.
“And there will be additional demand in bonds like we have never seen before,” he added.
Hilka also criticised the holistic balance sheet approach, questioning whether it made sense to “take more money from plan sponsors - that is, out of the real economy - to park it in a pension plan”.
He stressed that the German second pillar in particular was “safe enough already” without taking more money for the schemes from sponsors.
As for the upcoming quantitative impact study among pension funds, expected to be launched by the European Insurance and Occupational Pensions Authority in mid-October, Hilka pointed out that, in Germany, between five and 10 of the largest institutions with the “necessary resources” would participate.
“To think that you can derive a standardised model for all pension vehicles from is not realistic,” he said.