GLOBAL - Onerous constraints on pension schemes are hindering long-term investing and risking global economic instability, according to the World Economic Forum (WEF).
A report published this week claims mark-to-market accounting and new solvency rules starve financial markets of long-term capital by encouraging pension funds to focus on short-term market values.
The result will be to pull countercyclical funds and risk destabilising global financial markets by depriving them of liquidity, the report said.
APG - one of the pension scheme managers consulted for the report - said mark-to-market price changes made it harder to hold onto would-be long-term assets in a market downturn.
Long-term institutional investors held around 50% of $65trn (€45.7trn) in global assets in 2009 but only 25% in 2010.
The WEF report predicted the short-term trend would continue with the shift from defined benefit to defined contribution schemes as investment managers focused on avoiding risk rather than on generating returns.
In a broadcast that coincided with the publication of the report, WEF head of investors Max on Bismarck said any attempt to rebalance the focus away from short-term objectives toward long-term value creation and growth had to start with asset owners.
“We’ve seen their capacity decline at a time when it’s more important than ever to have long-term investment,” he said.
The report’s steering committee - which included representatives from APG, the Ontario Teachers Pension Plan and CalSTRS - issued six recommendations, primarily targeted at policymakers and regulators.
However, the report also issued recommendations for long-term investors themselves, including one that they should develop performance metrics that balance long-term investing with short-term accountability, and another for the introduction of compensation systems that align stakeholders with long-term mandates.
Winners from such strategies would include not only investors generating better returns via risk premia for assuming liquidity risk but companies better able to plan strategically for initiatives with significant upfront costs but long-term potential.
Pension scheme managers consulted for the report included Donald MacDonald of the British Telecom Pension Fund, Roger Gray of Universities Superannuation Scheme (USS) and Ann Simpson of CalPERS.