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Discussion on Panel 1: Long-term pension investment strategies under risk-based regulation - Niels Kortleve - OECD-Risklab-APG Workshop on pension fund regulation and long-term investment
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Discussion on Panel 1: Long-term pension investment strategies under risk-based regulation - Niels Kortleve - OECD-Risklab-APG Workshop on pension fund regulation and long-term investment

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This presentation by Niels Kortleve, PGGM, was made at the OECD-Risklab-APG Workshop on pension fund regulation and long-term investment held in Amsterdam on 7 April 2014. Discussions focused on: …

This presentation by Niels Kortleve, PGGM, was made at the OECD-Risklab-APG Workshop on pension fund regulation and long-term investment held in Amsterdam on 7 April 2014. Discussions focused on: long-term pension investment strategies under risk-based regulation; riskiness and procyclicality in pension asset allocation; and, regulatory challenges for long-term illiquid assets.

For more information, please visit:
http://www.oecd.org/daf/fin/private-pensions/OECD-APG-workshop-pension-fund-regulation-LTI.htm

Published in: Economy & Finance, Business

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  • 1. Discussion on panel 1: long-term pension investment strategies under risk-based regulation 1 OECD / APG Workshop ‘Pension fund regulation and long-term investment’ Amsterdam, April 7th 2014 Niels Kortleve
  • 2. Main conclusions research Risklab (underlining by NK) • Regulation in form of risk based solvency charges affects asset allocation decisions of LTI • For some asset classes, capital charges not in line with volatility/ downside risk → different investment behavior under economic view and regulatory view • Standard formula provides incentive to heavily invest in matching portfolio for liabilities • Tighter regulation demands for de-risking of investment portfolio • Sensitivity analyses illustrate dependency on underlying assumptions • Rules could rather stifle than encourage true “long-term” investment • SCR specifications have significant impact on relative attractiveness of asset classes 2
  • 3. Some lessons from risk-based supervision in the Netherlands 3 Source: Niels Kortleve, Wilfried Mulder and Antoon Pelsser (2011), ‘European supervision of pension funds: scope, purpose and design’, Design paper 4, Netspar, October 2011 • More focus on short-term funding requirements than long- term ambitions → • More focus on nominal benefits than real benefits/indexation • But no 100% hedging of interest rate risks • Increased nominal liability hedging increased real/indexation risks Conclusions • Supervision should strike balance between securing short- term financial position and long-term ambitions • Focusing supervision of IORPs on nominal/hard liabilities only altogether insufficient
  • 4. Holistic Balance Sheet (HBS) includes adjustment and security mechanisms IORPs 4
  • 5.  Surplus: 1.3 50/50 asset mix Assets 117.5Liabilities 100 Sponsor Support 1.1Mixed Benefits 21.9 Ex post Benefit Reduction -16.3 100% stocks Assets 117.5Liabilities 100 Sponsor Support 1.6Mixed Benefits 30.8 Ex post Benefit Reduction -32.3 100% bonds Assets 117.5Liabilities 100 Sponsor Support 0.5Mixed Benefits 16.7 Ex post Benefit Reduction -5.1  Deficit: 3.3  Deficit: 11.7 5 HBS: incentive for de-risking
  • 6. Some conclusions • Supervision should strike balance between securing short-term financial position and long-term ambitions • Focusing supervision of IORPs on nominal/hard liabilities only altogether insufficient • Hedging nominal liability increases real/indexation risks • Using derivatives for liability hedging increases execution costs (e.g. EMIR, FTT) • Regulation should not frustrate functioning of markets • EC should take holistic approach: by balancing risks with adequacy and sustainability (white paper), by including adjustment and security mechanisms IORPs (like in HBS) and by balancing IORP III/HBS with other regulation • Regulation could lead to changing pension deal • In the Netherlands debate on softer benefits (Defined Ambition) 6