EUROPE - Europe is running the risk of "killing" its own economy by applying regulatory pressure on pension funds to make them invest in bonds, according to Philip Neyt, president of the Belgian Association of Pension Institutions.
Speaking at the Eurofi Financial Forum in Brussels, Neyt argued that regulators ought to push the other way, favouring equities.
Pension funds should be investing money "longer and longer", he said, yet regulators are forcing them to go "shorter and shorter".
Neyt said total investments in pensions in Europe now stood at €3.5trn, only 40% of which was invested in equities.
Were Solvency II to apply to pension funds, he said, they would have to sell as much as €1.5trn of equities.
Neyt, who is also vice-president of mergers and acquisitions at the Belgacom Group, voiced concerns over a possible bubble in bond markets.
"If we lock ourselves into low returns and hit higher inflation, we shall be in real trouble," he said.
He argued that bonds were "short-term instruments", perhaps active over 10 years, compared with a pension fund's typical obligation of about 30 years.
He said that while equities may suffer from volatility, they were essentially "solid", as they were backed by tangible assets.
Neyt added: "If we don't deliver to our companies, the companies will go down, and if we lock ourselves too much into bonds, we'll get a bond crisis."
He also said Solvency II could lead to large swings in asset prices, which would lead to over-concentration in short-term duration instruments and bonds.
The danger is that the risk of pension fund exposure to bonds could eventually be transferred to individual retirees, something that "must be avoided at all cost", he said.