Monti seeks end to burden on pension funds

Date: 21/05/1998

By Tim Jones

EUROPEAN governments should lose the right to foist trillions of ecu of their own debt on to pension fund managers, according to Internal Market Commissioner Mario Monti.

He warned EU finance ministers this week that the imminent arrival of the euro made it more vital than ever to scrap national rules forcing pension managers to invest as much as one-eighth of their contributors' assets in domestic government bonds.

“This approach will enable funded supplementary pensions to benefit fully from the euro and a single capital market, to make a major contribution to meeting the challenge of the 'pensions time bomb' caused by ageing populations, and to boost job creation by lowering the costs of employment,” he said.

Four people of working age support every pensioner in Europe today and, warned Monti, this ratio would fall to two to one by 2040, with a consequently huge cost for state pension schemes.

Even a marginal improvement in the investment performance of private pension providers over an average 40-year working life would cut these costs.

But several governments impose 'currency matching' requirements on pension funds, obliging them to set aside a proportion of their assets in the same currency as their liabilities.

Belgium, for example, forces the small but growing number of supplementary pension providers to invest 15&percent; of their assets in their own bonds, effectively obtaining preferential access to private capital.

Monti believes that ending these restrictions would allow fund managers to ensure an “optimum trade-off between risk and return” and increase the share of equities in their investment portfolios.

Analysts say investment in shares is a long-term winner in the fight against inflation. Investing in fixed-income bonds is safer but, over a decade or more, returns from shares are much higher.

Europeans are already voting with their feet, with an explosion in investment by households in mutual funds. In the first three months of this year, total inflows into general funds in Germany, Italy, France, Spain and the Netherlands swelled to 90 billion ecu, compared with 40 billion in the same period last year.

The Commission has long regarded restrictions on investment by pension funds as a “severe distortion within the single market” but, when similar proposals to tackle the problem were last made four years ago, they were vehemently opposed by France, Belgium, Italy and Spain. These countries feared changes would restrict the right of governments to direct investment and protect the savings of their populations.

“Pension funds already account for the equivalent of 20&percent; of EU gross domestic product and yet are the only major financial service where there is no EU framework and where the efficiency improvements offered by the single market and the euro have yet to be harnessed,” said Monti.