Introduction of the euro, scheduled for Jan. 1, 1999, will raise major investment questions for European pension funds.
In the long run, the euro could spur economic growth in Europe, thus boosting stock and real estate markets. In the short run, it might cause heightened volatility as governments struggle to reduce budget deficits.
But there is an array of investment issues for pension funds, according to a guide developed by the Dutch Euro Project Group of Pensions Funds, which was set up jointly by Dutch groups the Association of Industry-wide Pension Funds and Foundation for Company Pension Funds.
The English-language version of the guide was unveiled at a recent conference of the European Federation for Retirement Provision and the National Association of Pension Funds.
Rather than lay out prescriptive answers, the guide raises a series of questions, ranging from investment to administration to disclosure to transition issues.
Key investment questions include whether the euro is expected to be a hard or soft currency, and whether it will be a reserve currency.
Benchmarks will have to be revamped. Presumably, the domestic benchmark for countries adopting the euro will broaden to include all euro-denominated stocks and bonds.
For stocks, country allocation will become less important while sector allocation will take on greater prominence, the guide said.
For bonds, "there no longer will be a risk-free rate of interest, as participating governments will no longer be in a position to solve their own payment problems through a national policy of inflation," the guide said. Also, spreads between euro-denominated bonds will be reduced, and will hinge on government fiscal policy and loan liquidity, not monetary policy.
The value of historic data also will change greatly. Stock data will have to be recalculated in euros, but data from periods before European monetary union will have to be footnoted to reflect differing exchange rates, said Jos van Niekerk of Unilever Pension Fund Progress, who chaired the body.
What's more, asset/liability modeling will be greatly affected by the euro's introduction, as correlations among EMU countries are expected to increase, while they may change relative to non-EMU countries.
"If you want to limit risk, do you want to diversify more" outside of EMU countries, Mr. van Niekerk asked.
Pension funds still can use asset/liability models, but "you have to interpret the data with some distance," he added.
Back-office operations also will be affected, as they adjust to settling trades and paying out benefits in euros.
However, costs of transactions and cross-border payments should decline.
Mr. van Niekerk urged pension funds not to delay. While introduction of new coins and notes won't occur until 2002, the euro will start shortly.
Only Dutch and Irish pension funds seem to have made much preparation.
"It's a bit of gambling not to be prepared," Mr. van Niekerk said.