GLOBAL - Industry heavyweights have criticised the suggestion that pension funds need to balance out the cyclical nature of financial markets by acting as long-term investors, warning that trustees are not “moral policemen” who can decide if investments can reduce global financial volatility.
The criticism comes after a report by the Bank for International Settlements (BIS) suggested institutional investors’ focus on liability driven investment (LDI) would have “systemic implications”, as it would serve to reduce the long-term nature of pension fund investment.
The report noted that, to date, the long-term investment horizon had served to mitigate the “pro-cyclicality of the financial system”.
However, Robin Ellison, former chairman of the UK’s National Association of Pension Funds and board member at SRL Global stressed that scheme trustees did not have a “social or economic role as long-term investors”.
“Their investments reflect the needs of their members and sponsors, which are incidentally long-term,” he insisted.
Anne Maher, former chief executive of Ireland’s Pensions Board and now an independent trustee, echoed Ellison’s view and said that a trustees’ responsibility was with the preservation of any existing trust capital.
“The fact that this frequently resulted in the provision of long-term risk capital was an indirect benefit which should not distract a trustee from his or her primary duties,” she said.
However, Maher conceded that recent market circumstances and the losses incurred by pension funds may have resulted in an over-emphasis of LDI, a matter which should be re-adjusted over the coming years.
Peter Kraneveld, former chief economist at Dutch asset management giant PGGM argued that the culprit was not simply the volatile market, but also local regulations that restricted the space and scope within which pension funds were able to invest.
He argued that LDI investing was “only a consequence of regulation” and that measures, such as the regular publishing of coverage ratio information resulted in the short-term outlook.
“If supervision is short term, pension fund policy will be short term. As a consequence, pension fund boards, framed as they are by local regulation, can do nothing with these observations,” he said, adding that strategies such as dynamic asset allocation were also squarely targeted at this short-termist view.
Ellison agreed with Kranenveld’s assessment that regulation was forcing trustees hands in this issue. He said BIS could do its part in encouraging long-term investment by pension funds through fighting to change “the regulatory and accounting rules to allow them to do so”.
However, Ellison insisted that taking a view that only maintaining returns in the interest of trustees could end up bringing about a dangerous mindset, mirroring that of company directors who value high dividends beyond all else.
“Morality and sensitivity to public goods certainly have a place in their decision-making,” he argued.
“But it is a question of balance, and trustees are not moral policemen nor have they the skills to decide which of their investment policies can reduce world financial volatility.”