EUROPE - Mercer has submitted its response to new regulations to comply with the EU Directive on the investment aspects of occupational pensions.
Carl Hitchman, European Partner at Mercer Investment Consulting, commented: Our main concerns lie with some ambiguities in the items directly copied from the Directive which may lead trustees to avoid innovative solutions that would genuinely help member security. We suggested clarifications of the more ill-defined requirements.
Two examples of this relate to the provisions on diversification of investments and the use of borrowing.
Diversification of investmentsMr Hitchman commented: One of the requirements, which we support from a general perspective, is for assets to be properly diversified in such a way as to avoid excessive reliance on any particular asset . The key word here is excessive , but who makes this judgement?
This provision may be seen as precluding trustees from investing a large proportion of assets in a particular gilt even though that would be a low risk strategy for most defined benefit plans. It may also be read as requiring trustees seeking to secure liabilities with insurance policies to split the purchase across several insurance companies, which may be impractical given the small number of providers.
We believe the regulations should encourage trustees to focus on diversification where it is a useful mechanism to reduce risk, not as an end in itself.
BorrowingMr Hitchman added: The regulations also state that borrowing is not allowed except to provide liquidity for the scheme and on a temporary basis. Yet there are circumstances where borrowing could help trustees improve the management of investment risks, such as changing the effective duration of a scheme s assets to better match that of its liabilities.
Rather than prohibit borrowing, we would prefer to see a restriction that allows this to be done if it helps reduce investment risk relative to a scheme s liabilities.
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