EUROPE - Divergent pension regulation is triggering perceptions of a pension crisis according to a study prepared for the OECD by Risklab Germany.

Both quantitative investment restrictions and regulation aimed at copper-plating benefits are also hindering pension funds from choosing optimal long-term investment strategies and could trigger regulatory arbitrage as different jurisdictions compete under the EU's occupational pensions directive.

The study modelled the optimal asset allocation for an identical pension fund, over a 30-year period, according to the regulations of five OECD pension jurisdictions.

It found an identical pension fund which was fully funded according to UK standards would appear 87% funded in the Netherlands and 69% funded under German rules. Optimal asset allocation strategies also differ between the jurisdictions.

Gerhard Scheuenstuhl, managing director of Risklab Germany, who authored the report said regulations could drive short-term asset allocation decisions.

"Regulatory restrictions can deny employers access to the optimal active liability driven investment strategies they need to help manage their pension liabilities efficiently," said Scheuenstuhl.

"The study highlights not only the need for a more harmonised regulation but also the need for a stronger emphasis on risk-based regulation but also the need for a stronger emphasis on risk-based regulation in combination with more flexibility," he continued.

Juan Yermo, co-ordinator of the private pensions unit at the OECD in Paris, warned against over-protecting members interests: "We accept that there will be differences but it is crucial for regulators not to focus just on benefit security but look at what the trade-off is between benefit security and the low level of affordability that this might imply."

Brigitte Miksa, head of international pensions at Allianz Global Investors, which owns Risklab Germany, said the impact of differing national regulations on investment strategy was a matter of concern.

OECD members have also agreed new guidelines to improve the security of pension fund promises. These propose regulators encourage sufficient funding, measure liabilities more accurately, set a reasonable time frame , such as seven years, and determine responsibility for funding gaps.

Yermo said the organisation would embark on a separate study to assess the effectiveness of mark to market accounting rules for pension liabilities, linked to corporate bonds or market interest rates.