IPE asked three pension funds - in the Netherlands, the UK and Sweden - ‘Do you think the authorities will respond to the current market turmoil with new regulation?' Here are their answers:

Penny Green, chief executive of the UK's Superannuation Arrangements of the University of London (SAUL) Trustee Co, which has AUM of £1.3bn (€1.7bn)

I think the problems that we're experiencing have had and are continuing to have such a profound fallout that it is likely to result in new regulation because that is the world in which we live. Whenever there has been an economic crisis there has been some regulatory response.

And given that the banks are perceived to be most at fault, it is likely that there will be regulation of the banking sector in some way, shape or form.

But it's not about investment banks selling toxic products to gullible pension fund trustees - it's very much an issue of proper banking discipline. There's a host of anecdotal evidence indicating that the concept of a prudent lender was ignored in the last frenzied weeks before it all collapsed.

What impact will that have on pension funds? Fundamentally I don't think the regulations will touch the pension fund industry, although there may be a marginal affect. There may be fewer bond and bond-type alternatives in which to invest, which is likely to be problematic as funds become more mature.

But there is a risk that pension funds will be inhibited from investing in some types of products. The problem is how do you define what is toxic and what isn't? There are CDOs out there that are still good buys because their underlying assets are still sound and there are CDOs that shouldn't have been touched at any time. And while I can see that people want to regulate between the good and the bad, my question is how? It just becomes far too difficult to regulate to that level of detail.

Pension funds in the UK have never been restricted by law in the asset classes they can utilise. Culturally, that is not the UK's chosen road, so from a UK perspective I think it is unlikely that that type of approach would be welcomed.

It sits very much with trustees and their advisers to challenge why it is a good idea to invest in a particular product. And that is being addressed through the Myners principles and the Pensions Regulator's code on trustee knowledge and understanding.

But hedge funds are being asked to be much more transparent. The Financial Services Authority has asked them to reveal their short positions in certain circumstances. You can see why regulators might be tempted to take such an approach if, as has been reported, rumours are being started to deliberately drive shares down so money can be made on short selling.

However, volatile markets emphasise that pension funds have to be allowed to take a long-term view and accept that equities cannot deliver positive returns year on year on year. Yet regulators don't look at that long-term view. They look at the one-year snapshot and there is an inherent conflict there.

In the UK we were particularly poor at the long-term view because we were not allowed to retain the fat in pension funds in a tax-exempt environment and so we were never allowed to build up a cushion against the bad times.

Peter Borgdorff, general manager of the Dutch Pension Fund for Care and Welfare (PFZW, formerly PGGM) which has AUM of almost €90bn)

I was not very happy when our regulator, the Dutch National Bank (DNB), introduced a new version of our financial assessment framework, the FTK, after the market crisis of 2001-03 because it was all done too rapidly and with too little discussion with the pension sector. But from the point of view of today's problems, we see that the FTK works, so I am much more positive about it.

And we see that the DNB also believes in the working of the FTK so it is not talking about new regulations because of today's situation.

But there is always the question of European economic developments, notably the inflation rate of 4%, although in the Netherlands it is around 2.6%. Inflation is a problem for capital funded pension funds and that is a worry for the DNB. But, again, this is not causing it to consider new regulations.

One of the discussions in the Netherlands is about private equity, hedge funds and other alternative asset classes because they are not regulated.

When the DNB examines our portfolio it is not about bonds or stocks, it's about these alternatives and it wants to know what we know about these products and the risks we are dealing with.

But we, the pension funds and institutional investors, have asked the DNB why it doesn't regulate the hedge funds and private equity so that then we would know we could invest in safe instruments and consequently it wouldn't have to examine the pension funds with those investment strategies?

But there is no need for regulation solely in the Netherlands. When you need regulation you have to do it Europe-wide or, even better, globally, because money is fluid so when there are hurdles in the Netherlands it will move elsewhere in the world.

And because of the international investment climate, when the US does something Europe will react. But to be honest, I don't mind. If regulators want to present a safer environment for investing in hedge funds, private equity or anything else, they should - and then we will find the investment strategies that we think is safe. That way we will know there is less risk for us.

However, another consequence of such regulation will be a lower risk premium. Less risk is nice but less premium is not so nice.

There are two other regulatory issues under discussion. The first is whether there should be a nominal FTK or a market FTK - that is, do you give an indexation guarantee or not? We have a nominal FTK without the indexation guarantee and the discussion underway is about whether the framework should change with guaranteed indexation.

The other is what's going on in Europe about Solvency II. Some regulators, especially in Scandinavia, want Solvency II to also be applicable to pension funds. These are discussions for the future, not on a member state level. We need an EU solution.

Peter Hansson, chief executive and CIO at SPK, the pension fund for Sweden's savings bank employees, which has AUM of SEK15.3bn (€1.7bn)

I anticipate that as a result of this downturn we will see a global trend to more regulation and narrower reporting requirements.
This is because politicians probably want to interfere, and in some areas of the world they should.

But I am not sure that this will happen in Sweden. Our regulator, the Finansinspektionen (FI), is ahead of the curve. Following the last market crisis, we have seen the introduction of the EU directive, where we have to follow the prudent person principle, and the establishment of a traffic light system to enable the FI to identify pension funds that are in danger of not meeting their liabilities because of their funding level and/or asset allocation.

During this period the FI has asked Swedish pension funds for reports on both a regular and an ad hoc basis to monitor whether or not they are sound.

Currently, we are being hurt in terms of asset pricing and returns but ironically we don't know how effective the traffic light system is because since its implementation interest rates have moved up. And while this means that fixed income has a lower value, liabilities are much lower because they have a much longer duration. So the funding ratio is in much better shape and no-one has entered the red light.

We now have a funding ratio of 148% and the returns are down 1% for the year but I think we're OK.

Since the last downturn we have divided assets into two types - liability-matching assets, which are derivatives and are monitored on the basis of what kind of risks you want to take and what kind of hedging ratio you want to have, and those that generate long-term returns. Over the last year we have recognised we are not smart enough to do market timing so are gradually increasing the amount of equities because that is going to deliver long-term returns. We need to handle the traffic light system not optimise it.

I wouldn't say that there is a constructive dialogue between the pension funds and the regulator. It issues its guidelines, then we have to understand them. There are discussions at that point but we have no way of influencing it to take another route.

However, there is much more European regulatory influence on us now than domestic. And there is a danger here. For example, as the US starts to introduce new regulations European politicians might follow. If they force us to leave risky assets there will be a cost over the long run. So I think that the Swedish way of doing it, with the traffic light system and ad hoc monitoring, is better.

I don't know whether there will be calls to regulate asset classes like hedge funds or private equity because we have excluded non-transparent assets.

Interviews conducted by George Coats 

Topics