The chief executive of ERAFP, France’s €23.5bn civil service pension fund, has recommended pension funds be allowed to enter into repo transactions with the European Central Bank (ECB) to help turn pension savings into more productive capital, with infrastructure investment the most suitable vehicle for doing so.
The idea is one of three models set out in a paper written by Philippe Desfossés, chief executive at ERAFP, and Elliot Hentov, head of policy and research for the official institutions group at State Street Global Advisors, in a paper called ‘Let the Savers SAVE Europe and Themselves’.
The premise of the paper is the argument that the prevailing period of sustained ultra-low interest rates is a threat to Europe’s pension funds at a time when “European economies are suffering from a lack of investment, notably in infrastructure, as a result of fiscal limits and weak growth”.
On the whole, pension funds hold too much fixed income, according to the authors, who set out solutions for shifting pension savings into infrastructure investment while respecting “the spirit of funds’ prudential guidelines”.
Desfossés told IPE: “We are overloaded with sovereign bonds bearing virtual capital gains, but we cannot realise those gains. To realise them, we would have to sell them, but, if it is to reinvest the proceeds in bonds paying the current interest rates, that would mean going back to square one.”
Infrastructure is seen as the asset class best suited to help realise the vision the authors have in mind, namely “liberated capital” in the form of capital gains from bond sales going towards those sectors of the real economy with the greatest potential for multiplier effects.
“In the euro area, investments should ideally also support the promotion of more integrated capital markets and the broader European Union,” they said.
They identify three models for channelling pension savings into infrastructure investment: “the repo model”, “the securitisation model” and “the guarantee model”.
Together, they amount to a proposal that is “a conservative approach in an asset class that tends toward long-term stability”, they write.
“If this were implemented and seen to be prudential as well as effective, similar ideas could be applied to expand investments into other asset classes that would help pension funds’ returns and deliver positive macroeconomic impulses,” they add. “It is a first step but should not be the last.”
The repo model appears hardest to achieve.
This is because it involves a pension fund entering into a repo transaction with the ECB, which is currently not possible because pension funds are not eligible counterparties under the ECB’s ‘General Documentation on Monetary Policy Implementation’.
An ECB spokesman – asked whether the bank would consider entering into repos with pension funds and, if so, under what conditions – told IPE it could not comment on this and made the above point about pension funds not meeting the ECB’s counterparty eligiblity criteria.
Desfossés and Hentov acknowledged this in their paper, but Desfossés told IPE that, “maybe you remember that the ECB was not allowed to buy sovereign bonds, neither was it allowed to launch a QE programme, and I was about to forget that, according to them, never ever would a member of the euro-zone would default on its debt”.
He added: “Maybe it’s about time we really start thinking out of the box.”
The securitisation model would be fairly straightforward to implement in that it would not require any “innovation or changes”, according to Desfossés and Hentov.
The drawback is that it is not scalable in that there is limited supply of infrastructure projects that have the backing of a high-grade supranational body such as the European Investment Bank.
The securitisation model has some similarities with the guarantee model that Desfossés and Hentov propose, in that it would also require backing (a guarantee) by a supranational or an agency, like a national development bank.
However, the authors note, the scope for this model is limited because these guarantees would count as government debt.