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Central banks probe pension asset allocations

GLOBAL – Global central banks have set up a group to analyse how recent regulatory and accounting changes have affected pension funds’ asset allocations.

The Committee on the Global Financial System at the Bank for International Settlements has set up a working group “to analyse the influence of changing regulatory and accounting standards and structural reforms of public pension systems on institutional investors’ asset allocation and risk-taking decisions”.

The committee meets four times a year and is mandated to monitor developments in global financial markets and report to the central bank heads of the G10 countries.

In the past year the committee has looked at the role of pension funds in the decline in long-term bond yields. The BIS sees a “constellation” of factors affecting pension funds globally.

“A series of developments affecting corporate pension funds have attracted the attention of analysts and regulators in recent years,” the BIS said in its annual report.

“Funding levels have deteriorated as a result of the low-yield investment environment that prevailed in the early years of this decade.

“Low returns on asset portfolios were reinforced by the inflating effect of low discount rates on the value of liabilities.

“The impact of this constellation of factors was compounded by the fact that many sponsors had taken advantage of the very favourable investment environment during the second half of the 1990s to reduce contribution levels on the basis of optimistic extrapolations of exceedingly high levels of return.

All told, “the immediate effect of these changes has been an increased awareness among companies and their external stakeholders of the magnitude of the issues related to unfunded pension liabilities”.

It added that increased portfolio allocations to longer-term fixed income securities are seen as an attempt to immunise the volatility of pension liabilities resulting from changes in the level of interest rates.

“These structural changes are likely to accelerate the shift away from defined benefit towards defined contribution plans, which has been under way in many countries for some time.

“Questions posed relate to the implications of these changes for the demand for various asset classes and for market dynamics.”

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