mast image

Special Report

Impact investing

Sections

IORP II’s risk-based approach may curb long-term investment [amended]

Related images

  • EU flag

The new approach to pension risks contained in the European Union’s draft IORP II Directive would hamper long-term investment, as pension funds reacted by increasing the liability-matching part of their portfolios and reining in asset-class diversification, Allianz Global Investors (AllianzGI) has warned.

Elizabeth Corley, chief executive of AllianzGI, said: “We share regulators’ objective to ensure a well-funded and healthy pensions industry in Europe, and understand the desire to establish a level playing field for different long-term investors.  

“Unfortunately, this study shows a number of unintended consequences stemming from the risk-based approach currently under consideration.”

Corley said it seemed counter-productive to discourage investment across a properly diversified range of asset classes, when this could lead to more stable returns and potentially cut risk.

<

AllianzGI said the study modelled the expected strategic asset allocation of long-term pension investors. 

It said this showed pension funds would probably alter their behaviour in two key aspects – the liability-matching part of the portfolio would grow at the expense of the growth segment, and diversification and expected returns from the efficient growth segment of the portfolio would shrink.

“The sustainability of pension provision depends on funds being able to make investments that generate an adequate return for their long term liabilities,” Corley argued. 

This needs a more nuanced and differentiated approach to risk factors – and the capital requirements associated with them – than the one being considered at the moment, she said.

AllianzGI said its study showed that the risk-based solvency regulation gave long-term investors a strong incentive to expand their liability-matching portfolios. 

On top of this, given the different capital charges for certain asset classes, few asset classes will be attractive for the remaining growth segment of portfolios, it said.

These few asset classes, the model revealed, would be cash, long-duration government bonds, emerging market bonds and – in the portfolios promising higher returns – a high portion of private equity. 

Most growth portfolios would be composed of only two or three asset classes, the study showed, with at most four asset classes being used at the same time.

A solution to the problem could be using an economics-based approach rather than the risk-based model, AllianzGI said. 

This would allow for differentiation between specific investment categories such as hedge funds, private equity, infrastructure, commodities and emerging market equity, which would otherwise be lumped together as ‘other equity’, it said. 

As a result, growth segments of pension portfolios would consist of up to 10 asset classes.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2548

    Asset class: Fixed Income, Emerging Market Debt Hard Currency (Active).
    Asset region: Emerging Markets.
    Size: CHF 300-400m.
    Closing date: 2019-07-30.

  • QN-2549

    Asset class: Fixed Income, Emerging Market Debt Hard Currency (Passive or Passive Enhanced).
    Asset region: Emerging Markets.
    Size: CHF 300-700m.
    Closing date: 2019-07-30.

  • QN-2550

    Asset class: Fixed Income, Emerging Market Debt Local Currency (Active).
    Asset region: Emerging Markets.
    Size: CHF 250-350m.
    Closing date: 2019-07-31.

  • QN-2551

    Asset class: Fixed Income, Emerging Market Debt Local Currency (Passive or Passive Enhanced).
    Asset region: Emerging Markets.
    Size: CHF 250-350m.
    Closing date: 2019-07-31.

  • QN-2552

    Asset class: Fixed Income, High Yield (Active).
    Asset region: High Yield (US).
    Size: CHF 500-600m.
    Closing date: 2019-07-29.

  • QN-2553

    Asset class: Fixed Income, High Yield (Passive or Passive Enhanced).
    Asset region: High Yield (US).
    Size: CHF 500-1'100m.
    Closing date: 2019-07-29.

  • QN-2554

    Asset class: Global Real Estate (Equity, unlisted Funds).
    Asset region: World (ex-Switzerland).
    Size: CHF 200 mn (potential for further growth).
    Closing date: 2019-08-07.

  • QN-2555

    Asset class: Real Estate.
    Asset region: European.
    Size: EUR 50 - 100 million.
    Closing date: 2019-07-22.

  • QN-2556

    Asset class: FX Hedging.
    Asset region: Global.
    Size: Mandate size of CHF 1.5 bn.
    Closing date: 2019-08-09.

  • QN-2557

    Asset class: All/large Cap Equities.
    Asset region: China A-shares.
    Size: Unit linked platform (0m USD in initial investment).
    Closing date: 2019-08-01.

Begin Your Search Here
<