EUROPE - The European Central Bank has warned that underfunded pension obligations may be leading investors into taking on too much risk - especially in emerging markets and high-yield bonds.

It also warned about pension funds' activity in the precious metals markets and talked of the challenge of managing longevity risk.

"Faced with the prospect that pension and retirement obligations could be underfunded, some investors may have been pushed into assuming too much risk, leading to an over-compression of risk premia, especially in emerging market and high-yielding corporate bond markets," the ECB said in its latest Financial Stability Report.

It added: "Moreover, by lowering margin requirements, historically and persistently low market volatility across a broad range of asset classes may have enabled some investors - including the proprietary trading desks of investment banks and hedge funds - to take on additional risk by leveraging their positions.

"As a result, and notwithstanding improvements in the fundamentals underpinning these asset prices, the upshot has been a "pricing for perfection" in the sense that valuations - including those in equity markets - appear to be based on very favourable expectations regarding future economic outcomes and low risk premia.

And there was also a commentary on "speculative flows" in the precious metals markets.

The central bank said: "Investment from significant investors such as pension funds in search of asset diversification also seems to have played a major role in recent price developments, particularly for precious metals such as gold and silver.

"As a result of the greater participation of investors in gold markets, the usual role of gold as a safe haven may have been affected by growing investment and speculative flows."

The bank devoted two and half pages of the review to the topic of hedging longevity risk for insurance companies and pension funds.

Despite numerous attempts to address the matter, the ECB says "the hedging of longevity risk remains a challenge for the foreseeable future".

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