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Asset managers criticise pension fund exclusion in systemic risk consultation

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Two of the world’s largest asset managers have dismissed the exclusion of pension funds in a consultation on institutional systemic risk, as international pressure for regulatory action continues.

BlackRock, Vanguard and industry groups dismissed claims pension funds should be exempt from being classed as ‘global systemically important financial institutions’ (SIFIs) as discussions continue on they should be subject to further regulation of capital buffers.

The comments came as the Financial Stability Board (FSB) and International Organisation of Securities Commissions (ISOCO) closed its second consultation on methodologies for identifying globally systemic institutions other than banks and insurers.

The consultation proposed excluding pension funds when it launched the consultation earlier this year, as it believed funds posed a lower risk to financial stability due to long-term investment plans and their heavy use of asset managers and investment funds.

PensionsEurope, the industry representative group, threw its support behind the FSB’s logic.

It defended the exemption and said pension funds were primarily governed by social and labour law – with a regulatory framework that required transparency, low leverage and prudent diversification.

Vanguard, which has $3.3trn (€3trn) in assets under management (AUM), said the logic for excluding pension funds meant long-tenured mutual funds should also be excluded.

The manager said 77% of its assets were held in such funds and it would only be logical to treat pension and mutual funds similarly.

BlackRock, an AUM of $4.7trn, said the regulators needed to take a more “holistic approach” which covered activities across the market.

The manager said asset managers were just one component and there needed to be a better understanding of asset owners and why they allocated to markets and asset classes.

“Regulation needs to be applied across products to be effective. Likewise, investment activities need to be regulated regardless of which entity is managing the assets,” it said.

BlackRock added: “Asset managers are not the source of systemic risk. [They] act as agents on behalf of institutional and individual investors and are not counterparty to client trades or derivative transactions and do not control the strategic asset allocation of their clients’ assets.”

The UK’s Investment Association (IA), the industry group for the asset management sector, agreed and said all market participants must be considered in its consultation.

The IA, however, said pension fund investment strategies, like those of asset managers’, could mitigate threats to financial stability, and it was therefore important to factor in activities and not “exclude ex-ante”.

It also said some pension funds employed captive asset managers, pointing out the difficulty in seeing how exemptions from any future regulation would work.

“The potential for competitive distortion with non-exempt asset managers is clear,” the IA added.

Defending the exclusion, PensionsEurope cited research from the Bank of England and European Commission that said pension funds do not react to short-term market movements nor experience the same issues as other financial institutions during the crisis.

“The probability a pension fund fails is very low and rare. They use derivatives only to hedge currency and interest rate risks, and not to speculate,” it said.

PensionsEurope also said failure and financial distress of a pension fund does not pose systemic risk because the risks are borne by members or sponsoring employers.

It said funds should either be fully funded, or subjected to different requirements to mitigate failure in a case of underfunding.

“Potential systemic risks are usually avoided. Consequently, in case of financial distress, other institutions do not bear risks,” it said.

BlackRock also condemned the FSB’s blanket approach of looking at AUM to determine systemic importance.

The manager said AUM metrics would create false positives and false negatives, and given the transmission channels identified for analysis by the FSB, leverage should be used as a basis over AUM, should the FSB insist on moving forward.

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