Unsubtle financial repression
Dutch politicians are acutely aware of the size and importance of pension funds and want pension assets to be channelled back into the domestic economy.
The equation is simple: the Dutch housing market is sluggish and domestic pension funds have around €1trn in assets. So why not get the pension funds to invest in the domestic mortgage market to the benefit of everybody?
The housing market could do with a boost – house prices have decreased by nearly 20% since the onset of the crisis in 2008 and a quarter of mortgage holders are in negative equity.
Earlier this year, the housing minister, Stef Blok commissioned a report from the chairman of the mortgage bank NIBC and former finance ministry official, Kees van Dijkhuizen, into potential institutional investor involvement in mortgage lending. Dijkhuizen recommended the issuance of government guaranteed bonds (NHOs) by a national mortgage institute (NHI) and claimed institutional investor interest.
Suffice to say, interest from pension funds has been lukewarm. Like Peter Borgdorff, CEO of the healthcare sector fund PFZW, writing in this month’s Guest Viewpoint, funds have reiterated that they must seek the optimal risk-return profile for their members when they make investment decisions, regardless of the domestic economic or political consequences.
The bailout of SNS Reaal earlier this year – encumbered as it was by property loans – weighs heavily on the minds of individual pension fund members, who apply considerable scrutiny to their funds’ investments, as the letter pages of the Dutch daily newspapers sometimes attest.
Now the IMF has intervened, to the support of pension funds, arguing that they must assess investments independently of political pressure. Instead of channelling pension fund assets to housing bond constructs essentially to support the banking sector, banks themselves should increase common equity and retain a higher level of earnings. This argument chimes with that of Anat Admati, whose book The Bankers’ New Clothes we review this month.
Nearly 20 years ago, ABP was privatised and undertook a comprehensive overhaul of its investment portfolio under the leadership of CIO Jean Frijns. Previously a warehouse for government debt, it adopted modern ALM techniques and diversified both internationally and across asset classes.
Regulation and maturing liabilities have already conspired to increase institutional investors’ allocations to government debt at a time when this is highly convenient for the issuing governments.
But channelling pension assets into mortgages, thereby also helping to solve domestic bank balance sheet issues, is a less-than-subtle form of financial repression that the funds could do without.