ECB should not consider European pension funds as 'collateral damage'

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The European pensions industry must not become collateral damage as the European Central Bank (ECB) rolls out its quantitative easing (QE) programme and increases pension deficits, with measures to counter low interest rates needed, PensionsEurope has urged. 

In a submission on the impact of QE, the industry association said regulators should postpone any fund valuations until the ECB ceased its stimulus or develop a discount rate that accounts for its impact.

PensionsEurope said it accepted economic growth was crucial for the Continent and declined to say whether the policy of QE was a good or bad one, but it warned that funds should not just be seen as “collateral damage”.

It added that the impact of QE would initially be hard to determine, and that the low-interest-rate environment was not solely driven by the ECB’s intervention.

“Along with this low-interest-rate environment, the QE policy is likely to further decrease long-term interest rates,” the paper said.

“Indeed, although the markets had anticipated the ECB policy of QE, after the announcement, 10-year interest rate on German bunds further decreased by 16 base points to 0.36%, but hereafter increasing to 0.39%.

“The 30-year swap interest rate decreased by 12 basis points to 1.24% but in the following days increased by 6 basis points again.”

The paper proposed a number of ways the impact of QE could be mitigated, such as suspending pension fund valuations, amending discount rates to take into account the impact of QE or allowing actuarial valuations to consider the policy’s impact.

It added: “The regulators could encourage scheme valuations to be based on an average funding figures over a defined number of last years to even out any adverse effects of QE on real bond yields.”

The idea of smoothing was considered by the UK government in 2013 in the wake of the Bank of England’s own QE programme, but dismissed when a consultation failed to show a strong case for introducing the changes.

In 2012, Sweden introduced a temporary floor for the discount rate used by domestic pension providers after they fell to then-historic lows of 1.3%.

Proposals to relax the valuation cycle or loosen funding requirements have already been rejected by Ireland’s Pensions Authority, which previously said there should be “no question” of changing the funding standard in light of QE.

Readers' comments (2)

  • Smoothing is a terrible idea, as we've seen in the Netherlands last year. It increases volatility between assets and liabilities.
    A floor on the discount rate is a better idea, but it carries a risk. If discount rates are lower than the floor for a number of years, capital is moved between generations. This isn't a problem as such (pension funds are meant for this!), but if it's imposed by regulators, the same regulators should provide a mechanism to make sure that there won't be just one generation that has to pay for this.

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  • The issue is not too complicated: a temporary situation (ECB intervention) is met with a permanent measure. According to OECD research and guidelines, that is bad governance. The situation is not too complicated either: a temporary addition to the discount rate, based on the estimated influence of the ECB intervention on interest rates.

    Failing such kind of solution, the powers that be, forcing pension funds to write emergency plans, cut indexation and cut risk budgets are guilty of pension (capital) destruction. Their job is the opposite.

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