PensionsEurope has mounted a robust defence of the role of pension funds in the global financial system in response to claims from asset managers that they pose a risk to international financial stability.
The association was responding to the consultation paper from the Financial Stability Board (FSB) on proposed policy recommendations to address structural vulnerabilities for asset management activities.
In its paper, the FSB made a number of recommendations to address what it sees as four main ways in which asset managers are structurally vulnerable, with two of the four – liquidity mismatch and leverage – considered the most important.
But a fifth area – which the policy proposals do not address – concerns the potential risks to financial stability that stem from pension funds and sovereign wealth funds.
Previously, BlackRock, Vanguard and industry groups had suggested pension funds should not be exempt from being classed as ‘global systemically important financial institutions’ (SIFIs).
And the FSB has hinted that pension funds could yet be considered systemically important.
But PensionsEurope, in its response to the policy proposals, said: “We agree with the FSB statement that pension funds contribute to the stability of the financial system thanks to their long-term horizon and due to the fact their investment choices are not significantly affected by temporary fluctuations of the markets.”
It said some asset managers seemed to “generalise or overestimate” the risk that pension funds could pose to the financial system, in requesting the FSB/IOSCO to also include pension funds in the NBNI-work.
And it noted that pension funds – as opposed to asset managers – were subject to extensive regulatory (prudential) oversight, based on the European IORP Directive, and on national regulations.
“Controlling the assets does not mean pension funds reallocate assets in a non-prudent manner or are a source of systemic risk,” PensionsEurope said.
It added that the European Insurance and Occupational Pensions Authority (EIOPA) – in its first European IORP Stress Test Report of 2015 – recognised that IORPs posed no systemic risk.
On the contrary, “they are able to mitigate financial shocks and work as a stabilising factor for the financial sector,” PensionsEurope said.
In terms of specific investment risks, the industry group dismissed references to “unproved potential for liquidity risk in some types of defined contribution (DC) pension funds”.
Apart from a situation where the IORP allows a member to transfer the capital value of the accrued benefit to another IORP or insurance company, it said, “the member cannot withdraw his benefits from the plan – moreover, there is a requirement for the assets of an IORP to be invested predominantly on regulated markets”.
And in relation to the use of derivatives by IORPs, PensionsEurope said: “We would like to reiterate that pension funds can only use derivatives to hedge risks and not to speculate – hence, the potential build-up of leverage is limited.”
It concluded with a stern warning for regulators.
“Regarding the use of less liquid assets, we recommend to authorities to refrain from over-regulating the pension funds sector, as requirements decrease the liquidity in the markets, making them more rigid,” it said.
“A more rigid market may prove not to be resilient in times of crisis.”