Reforms could cost European pensioners €4.7bn
Reforms designed to increase the safety and stability of financial markets could cost European pensioners up to €4.7bn annually, according to a group of leading retirement schemes.
Three Dutch pension managers, APG, PGGM and MN, and Insight Investment, the third-largest asset manager in the UK pension market, have written a letter to the European Commission highlighting concerns that returns to pensioners are at risk from new rules governing derivatives trading.
“This will hurt pension fund participants. They will ultimately pay the price,” said Thijs Aaten, managing director of treasury and trading at APG.
Since the financial crisis, a number of pension funds have increasingly used derivatives in order to protect their investments against unexpected changes in interest rates and the threat of inflation.
The letter’s signatories fear new rules on capital requirements, which were designed to prevent another global banking crisis, could force pension funds across Europe to raise up to €420bn in cash annually in order to continue to hold derivatives.
“This is a significant and disproportionate cost to European pensioners,” said Vanaja Indra, regulatory reform director at Insight Investment.
Under the latest iteration of the Basel III rules, which came into force last year, banks that sell derivatives require buyers to provide an additional cash buffer as security to protect against volatile price swings.
That cash buffer, known as variation margin, can change daily. In periods of heightened market stress, banks issue margin calls, demands for more cash, to derivative users.
Pension funds generally hold minimal levels of cash. The four investors, who collectively account for more than €1tn in assets, are concerned they will be forced to sell assets such as equities and bonds to have enough cash to continue trading derivatives.
This could result in an annual bill for European pensioners of between €2.4bn and €4.7bn, according to the pension funds’ estimates.
Ms Indra said pension funds should be allowed to continue to offer their existing holdings of high-quality government bonds, instead of cash, as security when conducting private bilateral derivative transactions.
The four managers are also concerned that the new rules could fuel volatility in times of market stress by forcing them to accelerate asset sales to meet increased demands for cash from derivative issuers.