Focus on risk management – Union Investment pensions head puts low yields at heart of risk discussion

Time was tight at a recent conference held in Germany by Union Investment, so its head of institutional business Alexander Schindler had time for only one question for the representative of the European Central Bank with him on the podium.

Would Schindler (pictured) ask ECB executive board member Jörg Asmussen about halting Eurozone crisis? About Greece and its trio of central lenders? Or how the ECB would help Spain?

No. Instead, he picked the topic of financial repression, of interest rates in core Europe being kept low, and similarly worthless rates on core debt. How would the ECB deal with this crisis for pension funds?

Asmussen said, in effect, that problems in pension portfolios were not within the remit of the ECB, only price stability was.

Alexander Schindler was absolutely right to highlight the problem.

Because, while Mario Draghi might have saved the Eurozone from immediate collapse, the low rate policy he has put in place to do so has transformed a political problem into an investment problem, of disastrously low debt yields for Europe’s pensions and insurers.

For now, low yields are an investment problem for pensions and their trustees, and insurers. In future, it will almost certainly be the next big political problem.

Speakers at the separate Fund Forum conference back in August unemotionally predicted that Europe’s future pensions crisis – comprised of too generous public sector deals, and too meagre debt yields at the heart of portfolios – would make the region’s present public debt crisis seem trivial.

Last week, a survey of European institutions published by Allianz Global Investors found current yields and interest rates among the top worries, rivalling even the Eurozone crisis in prominence. James Dilworth, CEO of AGI Europe, called the financial repression a “tragedy”.

Pensions that bought long-dated sovereign debt this year from Germany, the Netherlands, or Great Britain faced negative real yields, sometimes even negative nominal yields at auction.

They now face significant ‘price risk’, for example of nearly 30% on long-dated Bunds if yields revert to 50-year averages.

Perhaps the saving grace and, at the same time, problem for Europe’s pension system, is that it does not face one uniform ‘crisis point’.

It was clear what had to be done, with a deadline, when an entire country, of Greece, faced quantifiable debt repayments from its public purse falling due on specific days.

Europe’s pensions do face ‘bills’ to their policyholders, but there are ways to recalibrate their future liabilities to relieve the pressure on paper at least, and there is always the hope bond yields will normalise and equities will save them.



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