EUROPE - Pensions experts have warned regulators against requiring pension funds to make minimum-return guarantees due to the extra costs they would entail.

Speaking at a recent conference organised by the European Fund and Asset Management Association, Laurens Swinkels, portfolio strategist at Robeco, acknowledged that using minimum-return guarantees to protect members from financial institutions' inability to manage risk appropriately was "fair".

"However," he said, "some other investment solutions have proved to be much more effective than guarantees and make the pension fund market much more flexible."

According to Swinkels, regulators should focus on more "appropriate" rules, such as minimum-enrolment requirements and minimum contribution levels, instead of requiring pension schemes to make guarantees.

"New incentives should also be given to keep employees from taking their savings from their pension pots to buy a new house or car, as is currently the case in some European countries," he said.

"Regulators should introduce a minimum investment horizon, with some diversification requirements for pension schemes to follow."

But Pablo Antolin, principal economist at the OECD financial affairs division's private pensions unit, said capital guarantees were relatively cheap, easy to implement and could help build confidence in the private pension system if a number of criteria were met.

"Capital guarantees remain cheap only if they are fixed, benefit from long contribution periods and do not suffer from a switch in pension providers," he said. 

"If those conditions are not met, guarantees can represent a real cost burden for pension schemes."

Dick Saunders, chief executive at the Investment Management Association (IMA), argued that guarantees were not only expensive but "opaque".

"Between 2002 and 2010, the UK government has promoted guaranteed equity bonds and has launched 19 of those products," he said.

"These instruments seem attractive, as they provide a return related to the stock market, and after five years, if the FTSE comes down, the investor gets the money back.

"But again, the return is related to the index and not to the total return."