Perhaps the true long-lasting legacy of the 2008-09 financial crisis is a heightened focus on regulation. Although the crisis itself was not sparked by pension funds, they are all too affected by the new wave of rules generated by those events.
Often, lawmakers’ bid to avoid pension fund collapses leads to rules that limit funds’ tolerance for volatility and restrict illiquid investments. These regulations jeopardise the very purpose of pension investors, which is to match long-term liabilities. The problem is that, while pension fund legislation is politically driven, specific rules on investments and funding are enforced (and sometimes designed altogether) by independent supervisory agencies that are fundamentally responsible for avoiding funds running into funding difficulties but often have less of an incentive to ensure funds enhance their returns.
In unprecedented times such as these, the issue becomes even more relevant. Regardless of which European country you are visiting, pension funds will hardly complain about regulators. They will just try and make sense of new rules and get on with their job, which increasingly consists of avoiding risks and reporting, reporting and reporting again.
But looking at aggregate portfolios, across Europe and in individual countries, one wonders whether they are in a good place. The German second pillar, for one, has to do some serious rethinking of its fixed-income portfolios.
How can pension funds diversify, across asset classes, risks and investment timeframes, given the highly restrictive regime? Lobbying action at individual country and European level is working to fine-tune existing regulation in order to create a better-functioning and harmonised European pension sector.
But there is evidence that a change of thinking is required on the part of supervisory agencies and those who appoint them (in other words, policymakers). In Germany, there has been a proposal to implement separate supervision of IORPs (Pensionsfonds and Pensionskassen), which, according to one observer, “is currently a bottleneck” for BaFin, the country’s regulator. This could be overcome by rising contributions of the institutions under supervision, but discussions have stalled.
In many other countries, the tension between pension funds’ and regulators’ agendas is in danger of creating sub-optimal outcomes for members. That is not to say self-regulation is sufficient: the crisis has shown that. But at a time when pension funds may need to take more risk, they are prevented from doing so.
Rules and enforcement approaches need to be tilted towards long-term objectives and away from guaranteeing solvency at the expense of returns.