EUROPE - Demographic change could prompt greater competition between pension funds and banks, says the European Central Bank.

"Population ageing and the changing demographic environment will most likely support the growing importance of non-bank financial products and institutional investors," the ECB said in a report.

It added: "Further pension reforms and efficiency gains from specialisation, combined with increasing demand for financial advice and asset management services from more sophisticated households, will thus likely increase competition between banks, insurance companies, pension funds and mutual funds."

The comments come in a 69-page study called ‘EU Banking Structures', released this week.

A shift in household assets from bank deposits towards investments with pension funds and insurers "may provide further motivation for companies to form large financial groups (e.g. bancassurance groups) and/or for banks, insurance companies and mutual funds to cooperate more closely".

The ECB noted that the blurring of boundaries between financial sectors has regulatory implications.
The bank also acknowledged that reform of public pension systems and the shift from defined benefit to defined contribution schemes had "substantially increased households' risk exposure".

"They now bear far larger risks associated with pension provision, but financial institutions' and banks' long-term risk exposure with respect to e.g. inflation risk and longevity risk has also substantially increased." It was difficult to hedge these risks for households, whereas banks and other financial institutions) had a comparative advantage.

The ECB said that non-banking financial intermediaries' assets under management grew considerably in 2005: investment funds' total assets rose 14% in the EU-25 and pension funds expanded by almost 20%.