GLOBAL – Pension funds are becoming more central to the global financial system because of the way they invest, the International Monetary Fund says.

A series of recent developments “have increasingly put institutions such as pension funds and insurance companies more and more at the center of the financial system” the IMF said in its new Global Financial Stability Report.

“Indeed, it is now virtually impossible to conduct multilateral surveillance in financial markets at large and not to understand the intricacies of non-banks’ investment decisions and their motivation.”

The factors included the way non-bank sectors have assumed a lot of the credit risk previously held by banks as well as the growth in assets held by institutions.

It said global financial assets held by non-bank institutions have more than doubled in the past 10 years to about $45trn in OECD countries - “and they are expected to continue growing at a rapid pace”.

“Demographic trends necessitate pension reforms that are expected to create more and more ‘asset gatherers’,” the report adds.

“Consequently, the volume of financial assets under management by institutional investors such as pension funds, insurance companies and investment funds will continue to grow.”

And demographic changes and pension reforms “increase the size and importance of institutional investors such as pension funds and life insurance companies relative to more short-term-oriented investors”.

And the IMF noted that long-term institutional investors, who need to match their assets to long-term liabilities, show a strong commitment to strategic asset allocation.

“Such allocation is largely guided by long-term fundamentals as opposed to day-today noise in the markets. This type of investor is usually very large and can, by definition, move markets, especially if the markets are small and narrow.”

And such investors’ reallocations are “typically infrequent” and at a deliberate speed.

“In short, the fast growth of assets under management of this type of investor will probably have a stabilizing effect on financial markets.”

“In plain English, it takes them a long time before they decide to invest, but if they do, they remain invested and don't leave that investment all too abruptly,” said Gerd Häusler, director of the IMF’s International Capital Markets Department.

Topics