LONDON - Pension fund officials across Europe are under pressure to dump stocks and shift billions of euros into bonds.
Continental European pension executives have two guns at their heads: Government regulators are enforcing minimum funding requirements, and actuaries are forecasting lower returns from equities relative to bonds. The twin pressures threaten to reverse the trend of the past 10 to 15 years, when continental European pension funds significantly raised their equity exposure.
Regulators in the Netherlands, Denmark and elsewhere are forcing pension funds to reduce their equity exposure at a time when some pension executives think they should be holding on to their stocks.
"We are saying it is not necessarily a good thing to be selling equities now; we think they should be taking a longer-term viewpoint," said Alfred Kool, spokesman for the e50 billion ($51.2 billion) PGGM plan in Zeist, Netherlands.
Officials at PGGM, the fund for health-care workers, have had some informal discussions with the Pensions and Insurance Supervisory Authority, known as PVK, about the minimum funding requirements. Rein van Dam, pension director at the Apeldoorn-based PVK, did not return calls by press time.
PGGM and e149 billion ABP, the Heerlen-based pension plan for Dutch government workers, are conducting asset-liability studies that could result in changes.
Question of timing
Regulators are talking with a number of plans that, as a result of stock market losses, are now less than fully funded. Likewise, actuaries are advising bear-market-mauled schemes to rethink their asset allocations in light of lower expected returns from stocks, relative to bonds.
But plan executives, under scrutiny from senior financial executives for the first time in years, are indecisive as to the timing of this shift.
In the Netherlands, sources said executives at pension funds sponsored by Stork NV, Amersfoort, and Unilever NV, Rotterdam, as well as the industrywide plan MN Services, Rijswijk, all have examined asset allocation strategy and may make a swing to bonds. Officials at the funds did not return calls seeking comment.
In Denmark, officials at the e30 billion Danish Labor Market Supplementary Pension Fund, known as ATP, recently announced the fund cut its stock exposure to about 30% of assets from 45%.
"We are seeing a large number of plans commissioning new asset allocation studies, and there is a very noticeable shift away from equities to bonds," said Desmond Mac Intyre, head of the pensions strategies group at Deutsche Asset Management, London.
In Britain, the situation is being exacerbated by the introduction of a new accounting standard, FRS 17. It forces companies to mark pension assets to market annually in corporate balance-sheet footnotes.
"Many plans here have found themselves on the wrong side of the tracks, and yes there is a big move to bonds, but it (the underfunding) isn't that easy to get out of," Mr. Mac Intyre said.
Thus, plans' use of derivative instruments such as zero-premium collars and swaps, as well as active currency overlay and tactical asset allocation, is on the increase, he said.
Biding their time
Alain Grisay, a London-based business development executive with money manager F&C Management, said other plans had decided not to sell yet but were biding time. "I'm seeing several who are, instead, raising sponsors' contribution rates or capping the indexation of benefits. They are tackling the problem from the other end, the benefits end," he said.
The pressure from regulators in the Netherlands and Denmark followed plans' year-end reports for 2001, which showed some has fallen below their fully funded status.
Sources said these plans are in talks with regulators, but are under pressure to lower their equity allocations to conform to new modeling on expected longer-term returns.
"There are a number of examples of that in the Netherlands, in Denmark and some other countries. It is a huge issue that plans are worried about," said F&C's Mr. Grisay.
"The expectation is that the regulator will ask the sponsors to contribute to plug the funding, or less likely, these plans may be imposed to go to 100% cash," said Benoit Fally, the managing director of State Street Global Advisors' Brussels office.
Pressure from Dutch regulator PVK contributed to the e6.5 billion KPN Pension Plan's recent decision to reduce its equity portfolio in favor of bonds, sources said. KPN, Groningen, is a telecommunciations and postal services company.