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European pension funds adopt 'wait and see' approach to market turmoil

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  • European pension funds adopt 'wait and see' approach to market turmoil

GLOBAL - European pension schemes are adopting a 'wait and see strategy' as the US market remains highly volatile.

Several of the larger Dutch pension funds have decided to refrain from any sudden changes in their investment policies and will stick to their long-term investment strategies for the time being.

Jos van Dijk, spokeswoman for the €240bn civil service scheme ABP, told IPE: "Following the lessons learned from the credit crisis, we have elaborated our risk management on interest and inflation, improved our liquidity management and further spread our counterparty risk. Therefore, we are keeping our head cool and sticking to our long-term investment policy."

ABP's coverage ratio was 110% at the end of the second quarter.

Peter Borgdorff, director of the €100bn healthcare scheme PFZW, said: "We have decided to consider any response to developments on a daily basis. Meanwhile, we are looking at a variety of long-term scenarios."

He said the funding of his scheme - 110% at the end of June - had taken a considerable hit and that indexation had become less likely as a consequence.

"Although our coverage ratio is still sufficient, we might need to review our pension ambition," he added.

In Borgdorff's opinion, PFZW's biggest concern is not the economy, but a lack of decisiveness among politicians, who need to regain the confidence of the markets and the public.

He further indicated that PFZW was unconvinced of the effectiveness of the most recent EU financial support for Greece, or the EU's ability to maintain support for ailing countries.

According to Borgdorff, developments in the US have further undermined investors' confidence in the American economy, which is crucial for PFZW's investment portfolio.

"Although we have factored in foreseeable and possible risks, a downgrading of the creditworthiness of the US was not one of our scenarios," he said.

Borgdorff declined to elaborate on possible adjustments of the investment portfolio.

Earlier, PFZW's spokeswoman Diana Abrahams said it would be "very unwise" to let short-term volatility determine the pension fund's long-term strategy.

Similarly, Gerda Smits, spokeswoman for the €23bn metal scheme PME, said: "As a long-term investor, we won't let the issues of the day determine our investment policy."

The metal scheme is still holding 3% of its assets in peripheral euro bonds, of which €48m is Greek government bonds.

Smits added: "It is difficult to invest in 100% safety. What seems safe today could change tomorrow."

Two weeks ago, PME warned that market developments might hamper further recovery from its funding ratio of 98%.

Meanwhile, a spokesman for pension supervisor De Nederlandsche Bank (DNB) said "a number" of pension funds had reported underfunding following the market fall, as well as falling long-term interest rates.

Edwin Meysmans, managing director for the pension fund of Belgian bank KBC, said: "The situation in the US is still very unclear as we saw [markets] going up and down this morning.

"But the impact of the downgrade of the US economy and its consequences could have on our portfolio is minimal due to the strategies we have implemented over time."

The Belgian pension fund, which has not made any allocation to US dollar bonds, decided to focus on US equities only.

Meysmans added: "We implemented in 2007 a hedging rate strategy for LDI [liability-driven investment] that aims to protect our scheme against any potential movements in our pension liabilities.

"But we could also study other options to implement in the future to improve our protection."

Another European pension scheme based in Switzerland - which preferred not to be named - shared the same idea, saying the situation in the US would only have indirect influences.

"The more the volatility and the stock exchange are sustainable, the more the risk for pension scheme increases," the source said.

The source said the scheme had not had any board meeting yet over a possible strategy change, but added the priority would be to discuss the foreign exchange risk, as it was still difficult to predict how the US dollar would behave in the coming weeks.

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