Regulation: Pension funds join fray on systemic risk

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The consultation by the Financial Stability Board (FSB) on its proposals to address structural vulnerabilities for asset management activities has set off a skirmish between those institutions wanting mandatory stress-tests to include pension and sovereign wealth funds (SWFs), and those that do not. 

The FSB intends to complete this work on structural risks before it finalises assessment methodologies for non-bank non-insurer global systemically important financial institutions (NBNI G-SIFIs). But, at present, it does not include pension funds in this definition.

The FSB made recommendations to address what it sees as four ways in which asset managers are structurally vulnerable, with two of the four – liquidity mismatch and leverage – considered the most important. These included plans for system-wide stress-testing.  

But a fifth area – which the policy proposals do not address – concerns the potential risks stemming from pension funds and SWFs. And some asset managers are unhappy this group of investors might therefore be exempt from the stress-testing proposals.

Early shots had been fired by BlackRock, which highlighted the relative size of pension fund assets. In its response, it said: “As the consultation notes, ‘Third-party asset managers as a group only manage about one-third of the total financial assets of pension funds, SWFs, insurance companies and high net worth individuals.’ To yield meaningful results, any system-wide stress test would necessarily have to consider the other two-thirds of assets to provide an indication of a system-wide reaction to a give stress event.” 

Also, it said risks to the financial market ecosystem unaddressed in the consultation included spill-over effects of low and negative interest rates on pensions, insurers and savers. 

The pension fund industry has now retaliated. PensionsEurope noted that “Pension funds contribute to the stability of the financial system thanks to their long-term horizon and due to the fact their investment choices are not significantly affected by temporary fluctuations of the markets.”

It said some asset managers seemed to “generalise or overestimate” the risk pension funds could pose to the financial system, in requesting the FSB and International Organization of Securities Commissions (IOSCO) to include pension funds in the work on NBNI G-SIFIs. And it pointed out that pension funds – as opposed to asset managers – were subject to extensive regulatory oversight, based on the European IORP Directive, and on national regulations.

It concluded by warning: “Regarding the use of less liquid assets, we recommend to authorities to refrain from over-regulating the pension funds sector, as requirements decrease the liquidity in the markets, making them more rigid. A more rigid market may prove not to be resilient in times of crisis.” 

It now appears that the asset management industry may be disagreeing within its own ranks. BlackRock – while objecting to system-wide testing – says: “We recommend instead focusing on stress tests for individual funds.”

Vanguard Asset Management went further, saying: “We do not agree with the policy recommendation that authorities should require stress tests [of individual funds] and provide guidance on how they should be conducted. Further, we strenuously question the value of broader ‘system-wide’ testing.… such guidance would suffer from one-size-fits-all flaws that would make it difficult to interpret the results.”

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