European regulators must help pension funds adapt to the current environment of low interest rates and negative bond yields, according to PensionsEurope.
Among a range of proposals, the continent-wide representative body for European pensions said national regulators could suspend regular fund valuations until market conditions begin to normalize.
“Pension funds cannot be just seen as ‘collateral damage’ of QE as this concerns pension provision for millions of Europeans.” —PensionsEuropeUltra-low interest rates and negative bond yields have hurt defined benefit (DB) pensions across Europe, with deficits increasing despite positive performance from most asset classes.
PensionsEurope also encouraged regulators to rethink the definition of “risk-free”—usually defined as the 10-year government bond yield—as well as “stress the distortionary impacts of quantitative easing” (QE) to soften the effects of rising pension deficits on company balance sheets.
The proposals were listed in a white paper outlining the challenges posed by the introduction of QE by the European Central Bank (ECB) in March, and the limited ways in pension funds can respond.
“Although PensionsEurope acknowledges that economic growth is crucial for Europe and has no position on whether QE is good or bad policy, pension funds cannot be just seen as ‘collateral damage’ of QE as this concerns pension provision for millions of Europeans,” the organization said.
The paper also called for national regulators to adjust their policies regarding yield curves to take into account the negative yields currently being recorded by some shorter-term government bonds.
PensionsEurope suggested that regulators publish formal guidance regarding the adaptation of asset allocations to cope with short and medium term challenges, “without harming the schemes’ long-term goals”.
“The regulators could give more flexibility to any ‘full funding of technical provisions at all times’ requirements,” the organization added.
In the Netherlands, pensions are unable to increase equity risk substantially to compensate for low yields due to regulatory constraints. Countries such as Sweden operate a “traffic light” funding system and require pensions to have a funding ratio of at least 100%—something that is likely to be challenged in the current environment.
Meanwhile, Germany’s pension system has also borne the brunt of ECB policy. Despite a strong 2014 for investment gains, many of the country’s funds saw these returns wiped out by circumstances beyond their control. This has led to one German printing company closing its DB pension, citing low interest rates.
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