Europe’s mighty central banks are being stretched to their limits, not only in the range of problems they need to fix, but also in their financial firepower. In some countries, pension funds have stepped in as the new investors of last resort, transforming themselves almost overnight into Pension Fund plc by essentially taking over chunks of ailing companies.

And so it came to pass, Denmark’s largest pension fund ATP agreed to inject around DKK 50bn (€6.71bn) via government-guaranteed bank deposits into Danish banks in an attempt to shore them up during the financial crisis in October, announcing in November the fund “could” inject more, as it sees the investment as a good opportunity to lock in profit.

Bjarne Graven Larsen, (pictured right) ATP’s chief investment officer commented to IPE: “There is a two-year state guarantee and the rates are higher than we could get anywhere else with that risk profile. It is a simple term deposit, for a much higher rate than our funding rate in Denmark.” ATP so far has not lent any money at rates that were lower than CIBOR (Copenhagen Interbank Offered Rate), the interest rate at which a bank is prepared to lend Danish kroner to a prime bank on an uncollateralised basis, the Copenhagen equivalent to EURIBOR or LIBOR.

ATP has subsequently been selling short-term euro paper and buying Danish kronor. According to Larsen, the fund has been able to get rates that are at least as good as these CIBOR rates, and while on different maturities, they are all within the period of the state guarantee. “The Danish rate has been fluctuating in the last six months between 6% and 6.5%, so I would say that, even for a euro investor who has a liquidity surplus, getting 6% with a state guarantee seems an OK deal,” he said.

But not every bank injection turns out to be such a great deal for pension funds. The €193bn Dutch pension fund ABP is looking at taking legal steps against failed Belgian-Dutch bancassurer Fortis concerning its recent financial status. The pension fund had invested €500m in Fortis in June, upping its interest in the company to 2.5%, making ABP the second largest shareholder in the company. Since that investment, the value of the shares has tumbled from €10 to below €1 in mid-November.

“ABP decided last June, during the share rights issuance of Fortis, to take a share at its attractive share price of €10 per share. Including the existing share the total holding came to 2.5% of the share capital of Fortis,” a spokesman said, adding that Fortis’ promise at the time to come with a plan to improve its solvency played an important role in ABP’s decision to increase its holdings in the company. “Almost nothing has come of this [promise].”

The idea has prompted a political discussion in several countries. Should pension funds’ asset be used in times of crisis to invest in shaky banks and save them from perishing and should they be tapped for cash when central banks run out? Do governments actually need pension funds to provide money to the system?

In the Netherlands this discussion is being led by Kees Koedijk of the University of Tilburg and his colleague Alfred Slagter, who argue that the Dutch pension regulator and central bank De Nederlandse Bank (DNB) should relax solvency requirements for pension schemes, to allow them to become investors of last resort and make Dutch pension funds internationally more competitive.

Politicians are fiercely against such measures. They argue that using pension money to rescue banks causes even more stress - not for only pension funds, but also those who are building up a pension. And they doubt whether pension funds, themselves suffering from the credit crunch, are able to take a further blow. However, a number of pension funds have publicly agreed that the solvency requirements are too stringent, even arguing that the regulator forces pension funds into a fire-sale of equities in times of financial crisis, and welcoming calls for relaxation.

In the meantime, a number of Scandinavian countries seem to have acted. Finland is preparing for the arrival of new proposals to relax solvency regulations; the Danish ministry of economic and business affairs and The Danish Insurance Association have agreed on proposals designed to protect pensions solvency and prevent investors from being forced to sell assets in the current market turmoil.

Pension funds are investors for the long term and schemes would be the first to affirm their long-term horizon. In the case of ABP, using pension fund money to boost Fortis at a time when the fund itself was losing billions of euros on its equity portfolio was like putting oil on a gradually spreading fire. ATP, on the other hand, seems to have fared well. Using long-term investors’ assets to bring short-term relief sounds counterintuitive, although in the right conditions can prove to be lucrative.