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Long-term investing by life insurers and pension funds
Life insurers and pension funds are well placed to engage in long-term investing. Unfortunately, the global financial crisis has caused these institutions to rethink how much capital they can devote to long-term investing. Moreover, structural demographic pressures have already started to shorten the liability profiles for many pension funds.
The Solvency II directive will also lead insurers to shift their asset allocation away from equities and corporate debt towards short-term debt. Matters could become even worse should the Solvency II capital requirements be extended to pension funds. This would accelerate the overall shift away from equity in global asset allocation, making it more difficult for companies to raise capital, thereby constraining their long-term funding and the growth potential of the European economy.
Long-term investing by retail investors
Households have become much more sensitised to market risk. Therefore, providing convincing arguments on the risks involved in long-term investment will not be easy. From this standpoint, it is doubtful whether the creation of long-term investment funds, open to retail investors as proposed by the European Commission in its Ucits VI consultation paper, would be an effective way to convince retail investors to make long-term investments.
Boosting retirement savings and long-term investment
Normally, retail investors should have limited appetite for long-term, illiquid investments, unless they obtain tax advantages in return, such as those usually granted to retirement savings. Therefore, to be successful in channelling retail investors’ savings towards long-term investment, it is essential to focus on retirement savings. This could be achieved if the European Commission would develop a framework for European pension schemes that would incentivise a shift of retirement savings towards long-term investment funds.
EFAMA developed a proposal to this effect in 2010, and proposed naming such plans “Officially Certified European Retirement Plans”. A more elaborated version is being prepared to take account of comments received from stakeholders and highlight the role that such plans could play in pooling capital and using it to invest in long-term investment funds. This proposal will provide input to the European Insurance and Occupational Pensions Authority, which is working on the framework that could be adopted to develop an EU single market for personal pension schemes.
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