EUROPE – PensionsEurope has argued that the failure of any European pension fund would be unlikely to pose a systemic risk to financial markets, as schemes were merely "users" of those markets – not a part of them.

The lobbying organisation's comments came in response to the Financial Stability Board's suggestion (FSB) last month that its recent "too-big-to-fail" proposals might be extended to pension funds.

The FSB, which decided in July to include nine insurance companies in a group of "systemically important financial institutions" alongside banks, is currently developing assessment methodology to determine whether other financial institutions might pose systemic risk.

In a previous interview with IPE, Eva Hüpkes, adviser on regulatory policy and cooperation at the FSB, declined to specify exactly which types of financial institutions the Board might consider to be "systemically important", but she did not reject the possibility of including pension funds.

Reacting to those comments, Thomas Montcourrier, economic adviser at PensionsEurope, argued that pension funds were "not interconnected with the financial markets like banks" and were instead users of them in the sense that they did not issue assets to be traded.

Montcourrier also pointed out that, contrary to banks, which are all interconnected, solvency rules differ for pension funds across Europe.

"Therefore, if a pension fund was going bust, it is unlikely that this could affect pension funds in other EU member states," he said.

He went on to say that pension funds benefitted from a whole range of security mechanisms before going bankrupt, essentially freeing governments from needing to bail them out.

"The idea of the FSB's possible inclusion of pension funds in the group of 'systemically important financial institutions' is to see whether they would need to put more risk margin or more capital aside," Montcourrier added.

"But the security mechanisms between banks and pension funds are completely different."

He added: "As a last resort, pension schemes may cut pension benefits, increase contributions from the employees or count on the sponsor-support mechanisms, as well as some recovery plans, if the liabilities are too high for a certain period of time."

He said those reasons alone should be enough to dissuade the FSB from extending its 'too-big-to-fail' proposals to pension funds.

But Mirzha de Manuel, researcher at the Centre for European Policy Studies, disagreed that the latter presented no systemic risks, although he acknowledged the importance of differentiating between banks, insurers and pension funds.

"It's clear that, if a major insurer or a major pension plan were to fail, there would be some major consequences for citizens, and, ultimately, one can expect some sort of a bailout depending on the composition of the pension system," he said.

"The point is to look at pension funds at their optimum size and how detrimental their failure could be to beneficiaries."

Topics