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Warning over pension move into long-term bonds

GLOBAL – Pension funds have been warned that even a modest reallocation of assets into longer-term securities as they seek to match their liabilities could “overwhelm” the market.

“Pension funds are increasingly focusing on asset-liability management and in particular the relative duration of assets and liabilities,” the International Monetary Fund said. But it added: “An important issue for pension funds is the availability of long-term and index-linked bonds.”

“At present, even a relatively modest reallocation of pension assets into these long-term securities would overwhelm the market, as liquidity constraints could lead to significant short-term price volatility,” the IMF said in a 238-page ‘Global Financial Stability Report’.

The IMF is calling for governments to issue more longer-term debt to help pension funds meet their liabilities. “Certain policy actions may be needed to stimulate further issuance of long-term and index-linked bonds,” it said. This move “should enhance pension funds’ ability to act as long-term providers of capital and support financial stability”.

The fund put forward a set of recommendations on the global pension fund industry. These include encouraging workplace provision and hybrid schemes.

“Through occupational pension schemes, employers can most effectively organise the funding of employees’ retirement savings,” the report states. As for the type of scheme, the IMF says: “Traditional DB schemes and principles should not be uniformly discarded, and we believe the development of hybrid plans should be discouraged.”

It also called for regulatory policy to be more closely aligned to the structure of pension funds.

“Regulators should encourage funded plans to develop investment portfolios (including international investments) appropriate to the pension’s liability structure,” the IMF said.

“Such measures would encourage fund managers to focus more on risk management, rather than benchmarking performance against various indices, and should reduce the risk of herd behaviour.”

“This may imply quite different allocations between equities, bonds, and other assets by different pension funds and, possible more fixed-income investments by pension funds with a rapidly ageing workforce or closed to new participants.”

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