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Pensions funds should be more prudent in their bid to prevent scheme funding losses and resist from buying products they do not fully understand, according to the OECD’s Andre Laboul.
Asked about the recent sub-prime crisis which hit the performance of asset-backed securities, Laboul told IPE in an interview with IPE on Friday: The buyer, including the pension funds, should be more prudent when they buy structured products, and not just rely on rating agencies.”
Laboul, who is the head of the financial affairs division, directorate for financial and enterprise affairs at the OECD, as well as secretary-general of IOPS, argued rating agencies did play a big role in the run-up to the crisis.
“Buyers need to be more cautious and only buy something they understand,” said Laboul.
“Again, it comes back to transparency and education - the education of the trustees and of the manager of the pension fund: if they do not understand something, they should not buy it.”
According to Laboul, not only did a lack of financial education along with the mis-selling of products which contributed to the recent investment crisis, but a lack of transparency in securitisation added to the crunch.
“Securitisation is a very interesting example of something which is a virtuous factor but which may have vicious implications,” he suggesting, adding many pension fund investors do not fully know the risks behind asset-backed securities.
“Diversification and securitisation are a good thing, but the transparency was not high enough. Now we are in a situation where we can say it is a diversified risk, an investment principle, but we do not know where [the risk is].”
The OECD will discuss the sub-prime crisis at its next meeting, and will hold a round table discussion on structured products and the impact of the development of structured products on the financial markets.