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European pension funds could exacerbate systemic shock — conference speakers

European pension funds, traditionally viewed as stabilizers, might be forced sellers of assets during systemic shocks, the European Central Bank's financial stability expert said during a panel discussion at PensionsEurope conference in Brussels Thursday.

Asset owners across Europe have demonstrated an increased appetite for riskier assets due to an ongoing search for yield, which is currently unobtainable in government bond markets.

But according to Linda Fache Rousova, financial stability expert at the European Central Bank, because “pension funds have the potential to exacerbate the market volatility,” the data suggests that through pro-cyclical behavior the search for risk premiums could create an additional source of hazard in the system.

Matti Leppala, secretary general and CEO of PensionsEurope, said during a panel discussion: “Solvency framework applied in insurance markets have too short of a time horizon for pension funds, and it could amplify the size of the shock, which originated in the system.” The short-term focus of the regulation means pension funds often can't or won't act counter cyclically.

According to the data collated by the European Central Bank's expert, pension funds and insurance companies' allocations in eurozone investment funds now constitute some 40% of total allocations, a larger proportion than eurozone government bonds, which constitute 30%, Ms. Rousova said. In some European markets such as the Netherlands, pension funds recently piled into mortgage funds higher up the risk scale, for example.

“At the same time, although insurance corporations have increased allocations to assets rated in the BBB+/BBB- region, we really don't see pension funds data feature the same kind of trend,” Ms. Rousova said. “Pension funds are shifting liquidity risk but not the credit risk like insurance companies.”

Wouter Thalen, manager for public affairs at the €185 billion ($207 billion) Pensioenfonds Zorg en Welzijn, Zeist, Netherlands, who appeared on the panel, said that going up the risk spectrum is not a concern.

Pension funds have joined banks in the business of providing mortgages in the Netherlands via fund investments and have been actively investing in these funds for some three years now.

“Search for yield is not an area of concern if the pension fund develops an in-house capability and expertise to manage these types of asset classes,” Mr. Thalen said.