EUROPE - Pension funds should not be included under Solvency II, and proponents of such a move must recognise that pension funds are different to insurance companies, said Tim Reay, international pensions consultant at Hewitt Associates.
Some parties in Europe have called for pension funds to be included under Solvency II - a set of requirements similar to Basel II that covers insurance companies - but Reay said:
"I am sceptical of this. The theory states that, if the pension fund bears the risk, then it should be accountable for the risks. But is a pension fund really responsible for the risks, or is it rather the employer?"
"Some people tend to close their eyes to the fact that pension funds and insurance companies are different," said Reay.
Anthony Ashton, an investment consultant with Hewitt, added that including pension funds under Solvency II had become a political issue.
"In the UK, people would not accept such a move," he said. "They would fight it tooth and nail."
Players in the pension fund industry across Europe have roundly criticised calls for pension funds to be included. Con Keating, principal at The Finance Development Centre, claimed it would force funds to sell off their risky and illiquid assets and could even spark an equity market collapse of the magnitude seen in the early 2000s.
“When we saw people forcing insurers to get out of equities in UK, it created a new low in the equity market in 2002. If you do the same thing to pension schemes, you can confidently expect to have 2002 revisited and a lot worse.”
Jaap Maassen, chairman at the European Federation for Retirement Provision and director of pensions at ABP in Holland, agreed “absolutely” that pension funds would be forced to sell risky assets, adding the move would have a “significant negative effect” on pension fund revenues.
Peter Kraneveld, special advisor in international affairs at PGGM, said pension funds would essentially be forced into a bond-heavy portfolio: “If your shortfall risk is high, and it depends on the assets you are holding, the only way to remedy that would be to hold less risky assets, which would mean you would have to go almost entirely into bonds, and that in in itself is monoculture and risky.”
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