Pension funds could be forced into “fire sales” if regulation on cash collateral for derivatives is upheld, according to Roelof van der Struik, investment manager at the €180bn Dutch pension fund manager PGGM.

Speaking at the ISLA conference in Vienna, he claimed there was a “discrepancy” between regulatory requirements and the investment “reality” for European pension funds.

“The regulator wants us to hedge our liabilities, so we therefore need to use derivatives,” he said.

“But it also wants us to invest in the real economy, so it is not strange to think a significant part of our money is in infrastructure and other completely illiquid assets.”

If the use of derivatives were “taken away from us”, Van der Struik said, “we would be nothing but a bond fund”.

He also pointed to major differences of opinion on what was considered ‘illiquid’ – the insurance-linked bonds PGGM manages, for example, are “much less sought after, as they are less liquid”.

Van der Struik added half-jokingly that there must be “no crisis at the end of a quarter, please”, as there was no liquidity in the repo market, which would stoke “fire sales” even further.

He also warned that, if the European Market Infrastructure Regulation (EMIR) on collateral for derivatives and mandatory central clearing were applied to pension funds – for the first time – from 2017, they would incur “major costs”.

According to PGGM’s calculations, mandatory central clearing could reduce pension payouts from Dutch pension plans by nearly 3% annually and pensions in the UK from second-pillar vehicles by 2.4%.

“The pensioner is going to pay a disproportionately large part of the bill for a safe financial system,” Van der Struik said.

To the problem of collateral transformation, he said, one solution would be to give pension funds direct access to lenders.

This would be “the key” to transforming assets other than bonds into collateral, according to Van der Struik.

“I also need my equities to transform into cash for margin requirements,” he said. 

He said pension funds would not use their direct access to collateral transformation on a daily basis, “but we want to have it just in case”.  

“A crisis,” he added, “might force pension funds into fire sales because quotas must be fulfilled.”