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Pension funds lack 'right instruments' for long-term investing

EUROPE – Pension funds cannot be expected to provide long-term finance to the real economy, or invest in infrastructure or SMEs, if policymakers fail to provide them with the right instruments, EDHEC-Risk Institute has argued.

Responding to the European Insurance and Occupational Pension Authority’s (EIOPA) consultation on the design and calibration of the Solvency II Standard Formula for long-term investment, and to the European Commission’s Green Paper on long-term financing, EDHEC recognised that institutional investors had been increasingly drawn to infrastructure and private equity due to the returns those asset classes provide.

But EDHEC also argued that, even though policymakers wish to see institutional investors become more involved in the financing of the real economy, matching the supply of long-term capital provided by such investors with long-term investment demand was not “self-evident”.

“It requires a policy and regulatory focus on the type of instruments that long-term investors need, rather than which sectors of the economy qualify as ‘long-term’ investment,” EDHEC said.

“Thus, insofar as long-term financing will increasingly be provided by institutional investors in Europe, it will be to respond to institutional investment needs and focus on those investments and instruments that can best allow them to meet their long-term investment objectives while respecting their short-term constraints, especially their funding or solvency ratios.”

EDHEC stressed that the design of prudential frameworks such as Solvency II should not be altered to accommodate investments in infrastructure, for example, but should instead focus on project financing.

By project financing, EDHEC referred to the type of investment vehicle and instruments that allow long-term investment to take place and that embody what investors are after when they consider investing in infrastructure.

“Indeed, it is perfectly possible to invest in infrastructure without making a long-term bet,” EDHEC said.

“Policymakers and regulators should support the use of existing long-term instruments, as well as the creation of new ones that better respond to investors’ needs – for example, inflation-linked infrastructure debt.”

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