EUROPE – The European Central Bank has warned that the current low interest rates may lead to “reckless or speculative” investing by pension funds.

ECB executive board member Lorenzo Bini Smaghi said there was not enough research into the effects of prolonged very low interest rates, such as are current at the moment.

He cited work by Ragu Rajan of the International Monetary Fund into the issue, saying Rajan has developed some interesting ideas about the impact of low rates on investment behaviour.

Bini Smaghi told the DIW conference in Berlin today that this could result from a tendency to under-price risk “in a context of asymmetric information between lenders and borrowers”.

He said: “For instance, low rates of return might encourage reckless or speculative investment behaviour by pension fund and insurance managers (from the standpoint of investors).”

Bini Smaghi’s comments come as pension funds are shifting their asset allocations amid historically low interest rates and bond yields.

And they follow remarks from ECB president Jean-Claude Trichet last month which warned that pension funds and insurers could be sources of vulnerabilities that could spread “contagion” in the wider financial system.

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