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“One of the main consequences of this will be that this industry, and primarily pension funds, will assume a more important role and have a greater impact on financial markets,” said ECB executive board member Jose Manuel Gonzalez-Paramo.
“Pension funds all over the world already represent one of the largest class of investors. Their long-term investment strategies, as well as their choices of portfolio allocation, may already largely influence the prices we observe in the market.
“In addition, one could envisage that pension funds will become increasingly important shareholders in many corporations, with possible implications for corporate structures, investment choices, dividend policies and more broadly for corporate governance and the way firms are run.”
Gonzalez-Paramo said institutional portfolio allocation will probably become “more in line with individual preferences” – i.e. like defined contributions.
He said: “For example, we can expect that, as a larger share of the population gets closer to retirement, the portfolio allocation of defined contribution funds will move more towards less risky assets. Incidentally, such investment patterns would increase the likelihood of an asset meltdown.”
He argued that financial innovations could pension funds transfer interest rate and inflation risk to other market players – although the problem was “more complex” when it came to longevity risk.
This was much harder to hedge since it has no natural counterpart. He said: “It could be argued that long-term care providers, as well as pharmaceutical companies specialising in products for old people, constitute a natural counterpart for bearing longevity risk, as these industries would benefit from greater longevity.” But this industry seemed far too small to be able to satisfy the projected demand.
“Policy-makers should consider how to promote the development of markets to pool and transfer interest rate and inflation risk, as well as longevity risk.”