29 May 2015

PensionsEurope responds to NBNI G-SIFI's consultation

The failure or financial distress of pension funds, in principle unlikely, does not pose systemic risks because the financial risks related to pension funds are borne by their plan members and sponsoring companies. Pension funds should be fully funded and in case of underfunding different options exist in order to mitigate the consequences of a pension fund’s failure. The potential systemic risks are usually avoided by increasing the pension fund’s funding position, by decreasing the value of pension benefits, increasing premiums or by the no indexation of pensions’ decision. Consequently, in case of financial distress, other institutions do not bear risks, as these are borne by the plan members and employers.

Secondly, pension funds have limited short-term liquidity needs, which make them more inclined to buy and hold assets across the entire economic cycle. They also have an ability to behave counter-cyclical. According to the Bank of England pension funds ‘may also be less subject to pressure to respond to short-term market movements, or they may be more willing and able to take advantage of market movements by buying assets at the bottom of the cycle and selling at the top. As such, they might have the potential to play a stabilising, or even countercyclical role in the financial system.’ This has been proved during the last financial crisis. In fact, the European Commission itself acknowledged that pension funds did not experience the same problems as other financial institutions during the crisis: pension funds did not require any support in terms of funding from public finances.

Thirdly, pension funds do not employ significant leverage as they are legally limited in their borrowings. The low level of leverage ensures that a pension fund should not transmit significant financial stress to other counterparties.

Being low leveraged, risk averse and highly regulated long-term investors, pension funds do not pose a systemic risk to the financial markets and consequently they should be excluded from the scope of NBNI G-SIFIs. Pension plans sponsors managing assets in-house should be also excluded from the scope of the methodologies as they act solely in the interest of the pension plan.

Full PensionsEurope response

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