Focus Group: Regulatory overkill
Twenty-three of the pension funds polled for this month’s Focus Group survey find their regulators’ approach affects their investment strategy.
A Dutch fund said of its experience: “We tend to look at the effect of some asset classes on the risk model of the regulator instead of looking at the effect on the long-term risk-return profile of our fund.” An Austrian fund added: “There are constraints defined by law for each asset class. We always have to keep these limits in mind.”
However, a Swiss fund found the opposite: “[There is] no intervention, we just need to respect the rules for investment companies and make sure the monthly payments for the beneficiaries are assured for the very long term.”
Half the respondents said they encountered instances where an investment opportunity that fits their portfolio could not be implemented because of regulatory issues. “[It is] hard to convince [our] regulator of new products – we were looking to introduce an equity-linked bond fund, but ran into a brick wall,” said an Irish fund.
Thirteen respondents describe their regulatory regime overall as close to interventionist, with just two considering theirs to be approaching laissez faire.
More than one in three of those polled are finding certain aspects of regulation tough to comply with, in particular the new FTK rules for Dutch pension funds. A UK fund highlighted “the sheer volume of changes and the increasing amount of information that needs to be reported. Slow release of the detailed regulations by government means that we have less time to be able to develop appropriate processes and controls that are required for successful execution.”
For a third of respondents, the liability discounting method required by their regulators is mark-to-market rate, while for a further third it is a prudent rate determined by the fund. For the remainder there is a fixed rate prescribed by the regulator.
Respondents are evenly split as to whether they would change their liability discount rate if they had the freedom. A Swedish fund commented: “Long-term investing needs stable or slow-moving valuations. Mark-to-market forces us to set capital for short-term liability volatility in the mark-to-market valuations. [This is] not to the benefit of future pensioners.”
A UK fund that would not change said: “I believe in sticking consistently with prudent expectations of future returns, subject to sense checks including historic returns and asking investment managers (rather than investment consultants) to inform the plan for expected returns.”
A minority (less than one in five) of funds have sold assets due to regulation, with a Swiss fund stating that this is “because of the non-announcement of having trespassed [over] the declaration limit”.
A small majority of respondents find technical guidance from EIOPA to be irrelevant, while a further six respondents think it is a negative contribution. A little under half of the respondents think EIOPA’s proposed stress test will not improve understanding of the impact of scheme investment strategies.
A Swiss fund believes regulators should “switch from a rather standard approach of ‘ticking the box’ to a more individualised analysis for each scheme”. A Dutch fund feels it needs to be “sensitive to [the] long-term duration of pension funds. Some principles require immediate funding, while payouts will only take place in 25 years”.
A third of respondents are required to report to their regulator each month, with the same number doing so quarterly, and a further third annually. One UK fund is only required to report every three years. For three-quarters of respondents this interaction takes the form of written reporting only, with the remaining funds also required to attend face-to-face meetings.