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European Investment Bank could guarantee ELTIF-backed projects, suggests PensionsEurope

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  • The European Commission

The European Investment Bank should be encouraged to work with managers behind the European Commission’s long-term investment vehicle, offering capital guarantees and its own expertise in evaluating projects, PensionsEurope has said.

A position paper published by the European pension association also said the European executive should consider relaxing guidelines around the use of derivatives in its proposed European Long-term Investment Fund (ELTIF), allowing investing pension funds to continue with “sound” risk-management strategies.

The association further argued in favour of a broader list of eligible assets, speaking out in particular for the inclusion of listed small and medium-sized enterprises (SMEs), and said the vehicles should be also be able to exceed 30% leverage.

The draft ELTIF regulation, published by the Commission last June in the wake of its long-term investing Green Paper, currently does not allow the vehicles to use commodities, engage in securities lending or borrowing, or use derivatives “unless these instruments are used for hedging purposes”.

However, the association argued that the limitations on derivates should be reconsidered.

“We wish that the use of derivatives would be allowed to hedge against risks associated with all ELTIFs investments and not only against interest rate or currency risks,” the paper said.

“This would allow institutional investors such as IORPs to have a sound risk management strategy.”

It also suggested that the current maximum leverage threshold of 30% should be reconsidered, “especially for funds mainly composed of equities”.

“Indeed, we consider the investor to be aware of the risk attached to these types of funds,” it said, arguing that the threshold be raised to 50%.

PensionsEurope also suggested that, to make the mutual funds more attractive to the core audience of small to medium-sized pension funds, the European Investment Bank should offer guarantees for some of the investments made through the ELTIF.

“The EIB’s Project Bonds Initiative and other similar activities should be directly linked to the ELTIF,” it said, “with the EIB assuming riskier tranches and providing guarantees.

“This would reduce the risks inherent to these kinds of investments, and investors would see the ELTIF as a secure investment vehicle.”

It also recommended the EIB and other national bodies “actively cooperate” with asset managers and investors involved with the ELTIFs, as smaller pension funds could not be expected to possess the resources to assess infrastructure projects.

However, despite suggesting several amendments, PensionsEurope said it was broadly in favour of the funds.

“Pooled investment vehicles are important for smaller IORPS so they can invest in long-term projects without jeopardising the diversification of their asset allocation,” it said.

“Furthermore, by pooling existing knowledge, institutional investors may profit from each other’s expertise in different areas so that all of them stand to gain from a pooled investment vehicle.”

Readers' comments (1)

  • The bottleneck of guarantees in ELTIF field is actually the last diaphram in Pension Funds involvement in Long Term Investing. Correctly PensionsEurope made this kind of analysis, given the particular nature of PFs. Guarantees added to the evidence of cash flow, long term planning, of regulatory framework stability etc. could open a new era in Long Term Investing in Innovative Common Good Social Infrastructures. This, under the Financial Crisis, could have powerful countercyclical positive effects, given the huge amount of diversification investments. Italian and Deutsche Trades (CGIL and DGB) are just at work to define proper strategies for ELTIF regulation.

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