Governments throughout the eurozone are making huge strides in tapping into pension fund assets as a potential source of financing domestic economic growth.
While some are using the carrot approach, others are wielding the stick to access pension assets.
“Europe has been relying a lot on banks to finance (small and midsize businesses) and infrastructure, much more so than the U.S., which relies more on capital markets,” said Raffaele Della Croce, economist in the private pensions unit at the Paris-based Organization for Economic Co-Operation and Development. Given banks' constraints on lending, the need for alternative sources for financing economic activities is more drastic, he added. The issue prompted the OECD's project “Institutional Investors and Long-Term Investments.”
The European Union — along with the governments of Ireland, the U.K., Denmark and the Netherlands, among others — is implementing initiatives to tap into countries' large pools of pension assets to help spur economic growth.
The moves have been prompted by two factors: constraints in borrowing that governments face and a volatile market environment that limit institutions' appetite for equities, said David Blake, director of the Pensions Institute at Cass Business School in London. “Since governments are currently unable to make the sort of capital investments that would normally help to get their economy out of recession, they're encouraging those with the money — especially the pension funds — to do so instead,” Mr. Blake said.
One of the most conspicuous examples of how governments are using political muscle to influence pension investing is that of Ireland's National Pensions Reserve Fund, which was established in April 2001 to supplement the country's pension costs starting in 2025.
As of Sept. 30, the Dublin-based NPRF shrank to about half of what it was at its 2007 height of about €22 billion ($29 billion). A large proportion of the fund was used to recapitalize Irish banks in 2009, and about e6 billion remains in the discretionary portfolio — which had an allocation of 49% in equity, 18% in fixed income and 33% in alternatives as of Sept. 30, according to data from the NPRF. The directed portfolio totaled about e8 billion and is invested in the Bank of Ireland and Allied Irish Banks.
“The vast bulk of the fund has been used to recapitalize banks, and a lot of that probably will not be recovered,” said Jerry Moriarty, CEO of the Irish Association of Pension Funds, Dublin.
Of the remainder of the discretionary portfolio, additional assets likely will be channeled into “productive investment into sectors of strategic importance to the Irish economy including infrastructure, water, venture capital and provision of long-term capital to the (small and medium enterprises) sector,” according to an e-mailed response from an NRPF spokesman who asked not to be identified. “A key principle is that the NPRF investment, which is to be solely on a commercial basis, will seek co-investment from third-party investors. In this way, the fund's assets can be used as a catalyst to attract additional third-party capital for investment in the Irish economy.”
According to the e-mail: “Ireland-focused investments will be structured with the twin objectives of generating a commercial risk-adjusted return for the fund, while benefiting the Irish economy.”
Such initiatives “can be seen as a win-win situation, matching the government's need for cash and pension funds' need for long-term investments,” Mr. Moriarty said. “But they can be fraught with dangers.”
An obvious potential setback is a lack of diversification, he added.