EUROPE - Fiduciary management consultant Anton van Nunen has warned one of the most imminent problems pension funds no face is the downward spiral caused by regulation from which pension funds currently suffer.
Van Nunen, who is often considered the founding father of the fiduciary management movement in the Netherlands, is nominated for an Outstanding Contributions Award at the IPE European Pension Funds Awards 2008 in Barcelona this evening but told IPE ahead of the event current legislation means pension funds can no longer execute their long-term policy in the way they might have done in the past.
"They almost have to work procyclically, and in any case they have to heed the risk of bankruptcy," he said.
He added the current environment would ultimately result in a fire sale of equities, which would leave only bonds as an asset class, but in turn push away interest rates and raise liabilities without improving the cover ratio of the fund.
"This is a downward spiral caused by legislation. We have to challenge this," said Van Nunen, who has pleading for a return to the use of longer-term average discount rates instead of continuously monitoring certain parts of the swap curve, which can fluctuate heavily.
Other imminent issues on pension funds agendas should be recovery from underfunding and longevity, according to Van Nunen.
"We need much better diversification, and better portfolio construction should really taken into close consideration by all pension funds," he warned.
According to Van Nunen, a new world has come into existence, whereby the risk linked to equities and bonds need to be redefined and mapped out again: "Surely, on this basis, pension funds will need to do a new portfolio construction."
Pension funds also need to realise considering longevity will be a ruling factor in getting out of underfunding, he added.
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