Want Investment Freedom? Head to the Nordics

(November 8, 2012) — Financial regulators in the Nordics have helped investors through the financial crisis while their counterparts in the rest of Europe have tied the hands of those they were meant to protect, a leading research firm has claimed.

Investors in Denmark and Finland found solace with their financial controllers as the crisis worsened, a report from Greenwich Associates said this week. Danish pension funds were allowed to alter how they used the discount yield curve to measure liabilities as government bond yields fell, while Finland made changes to its solvency requirements so to avoid forced selling of equities by institutional investors.

Large investors based in Western and Southern Europe were not so lucky. European Union-wide regulation including Solvency II and the Alternative Investment Fund Managers’ Directive (AIFMD), although not yet implemented have been casting a shadow across the continent and most financial regulators have done little to ease the burden.  

“Regulations and regulatory uncertainty have caused institutions throughout much of Continental Europe to put off or limit alterations to investment strategies that would diversify their portfolios away from European government bonds and other fixed-income investments,” said Greenwich Associates consultant Marc Haynes. “In order to truly guarantee the long-term solvency of Europe’s institutions, it may be time for politicians and regulators to consider some regulatory relief.”

Greenwich Associates said large insurance companies across the continent, the asset allocation of which is predominantly fixed income, cited Solvency II as the main impediment to the risk-taking in their portfolios.

Low interest rates have hit these investors and some have declared that they cannot pay out minimum returns on collective pension insurance contracts due to poor investment earnings.

Some large French pension funds told the research firm that they were shifting their domiciles to Belgium or Luxembourg, which they viewed as having more supportive regimes for pension schemes that were struggling with funding levels.

In the Netherlands, the financial regulator moved to allow pension funds to measure their liabilities on a three-month time frame, but investors with falling funding levels have claimed this is still too short.

In the UK, retirement funds have also been hoarding high levels of fixed-income assets, according to the country’s Pensions Regulator. Yesterday, an update on investment portfolios showed the proportion of gilts and fixed interest in UK pension fund portfolios rose to 43.2% from 40.1% in 2011.

In the UK, Quantitative Easing has pushed down gilt yields, which has in turn pushed up pension fund liabilities.

Greenwich concluded that “basic maths” showed steps like those taken in the Nordics would be required across the rest of Europe. “Simply put: Underfunded pension plans and struggling insurance companies will not be able to meet their funding requirements in the current investment environment without the flexibility to add appropriate levels of risk to their portfolios.”