War on regulatory arbitrage?

As indicated earlier, some stereotypical anti-competitive reflexes begin to rear their ugly heads in the wake of the open conflict between Belgium and the Netherlands on pensions regulation. The President of DUFAS asks for a war on regulatory arbitrage, which can be translated into war on competition, of course. This brings the Pensions Directive to a critical juncture in its application relatively early on - here's to hope that the Commission will handle this diligently.

One is tempted to refer the Dutch back to the basics of the Cassis de Dijon principle and following jurisdiction. Applied naïvely to IORPs and the Pensions Directive, that principle would entail that the set of regulatory norms (for instance lower solvency) deemed sufficient by one member state's authorities needs to be recognised by every other member state (with the famous exception of measures required for the "effectiveness of fiscas supervision, the protection of public health, the fairness of commercial transactions and the defence of the consumer", of course).

Therefore, regulatory arbitrage is part & parcel of the Pensions Directive. The only alternative is harmonisation of occupational pensions, and that is what member states shied away from at the inception of the Pensions Directive.

Ask the economist

The OECD has published an interesting protocol of an online debate with OECD economists about the pensions challenge. There's plenty of materials and food for thought there, especially in the background readings listed, or the annuity debate; one wonders whether the lack of private annuity products may not to some extent be due to an effective crowding out by mispriced public policy alternatives - but unfortunately that question is not touched upon.

CFA Institute ups the ante on XBRL

In his April letter to 80'000 Members of the CFA Institute worldwide, CEO Jeff Diermeyer gives another boost to analyst awareness of XBRL. Judge for yourself:

The Time Is Now to Look at XBRL
As I mentioned in my December letter, I am encouraged by the promise that XBRL — an interactive data-based language that allows the tagging of financial (and potentially non-financial) information — holds in enhancing the ability of investors to analyze companies. I believe XBRL can significantly improve the accessibility and accuracy of financial statements and, ultimately, the quality of our global capital markets.

Recently, the New York Society of Security Analysts (NYSSA) held a seminar on XBRL at Baruch College. I wish you could have joined me at the seminar where Tom Larsen, CFA, chair of our XBRL working group, delivered an informative presentation (PDF) and I provided an update (PDF) on our involvement in this area.

If you haven't already, it is now time for you to take a good look at this new technology. Fundamental analysts, portfolio managers, credit analysts, quants, risk modelers, and academics should all evaluate how XBRL may change their investment processes. XBRL has developed to a degree where it is worth your while to investigate. We will attempt to deliver this information to your doorstep or desktop, although seeing the live presentations would be most effective.

In addition, in order to accelerate adoption of XBRL by companies, I urge you to ask company management where they stand with XBRL implementation. A little nudge from many of you will pay dividends.

CFA Institute, through its Centre for Financial Market Integrity, has formed an XBRL working group of nine members from diverse investment professional backgrounds, which has been charged with three main tasks: 1) Draft a position paper on the use of XBRL-tagged data in financial reporting from the end-users' perspective; 2) Survey CFA Institute members about the key elements needed to develop and maintain a high-quality XBRL system for delivering information to investors and investment professionals; and 3) Provide detailed implementation feedback to the SEC and to XBRL US Inc., the primary organization for the development of the XBRL taxonomy for financial statements and note disclosures provided for SEC filings.

We will keep you posted of further developments.

We are certainly looking forward to that!

Mitigating cost of ageing

McKinsey has an interesting Chart Focus displaying the mitigating effect of direct & indirect policy measures on the opportunity cost to growth of ageing societies. By far the largest effect could be had in Germany by raising the average rates of return on savings, which would not appear to be outlandish, given the notoriously conservative nature in which German savings tend to be invested. Immigration and higher fertility pale in comparison.

Location competition starts to bite

Evidently, the cross border competition for locating IORPs starts having an impact - at least, that's the impression you get when reading this story about the Dutch central bank lambasting neighbouring Belgium's new (and competitive) pensions regulation. We wonder for how long the Commission will be able to uphold its politically highly sensitive stance of tolerance towards regulatory & supervisory shopping - which is conceptually at the core of the Pensions Directive.

P.S. Naturally, the Belgian response wouldn't be too far out.

Institutional Life Markets Association

IPE has an interesting story about the recent foundation of Institutional Life Markets Association (ILMA), a non-profit trade association to “encourage best practices and growth of the mortality and longevity related marketplace”. Founding members of this potentially highly relevant association are Bear Stearns, Credit Suisse, Goldman Sachs, Mizuho International, UBS and West LB AG. The association does not appear to have a website, yet.

CFA Magazine finds

The CFA Magazine often is a good source of interesting material, written in a competent, yet conversational style. Cases in point are Stephen Brown's article about RIXML, an electronic data format similar to XBRL, but specialising on research information and therefore not quite as pervasive as XBRL, and John Rubino's excellent piece about global liquidity, providing insights into the global yield curve and failing monetary policy in the presence of free flows of capital and the carry trade.

Draft Swiss pension law

Swiss pensions association ASIP has published a concise draft of a revised occupational pensions law to assist the ongoing debate about simplifying the overly complex current law. Surprisingly, this draft still does not refer to the prudent person rule in its asset management section. Encouragingly, the draft does away with politically set rates such as the conversion rate or the guaranteed minimum return.

At the same time, ASIP has published the executive summary of a research paper examining the alleged over-capitalisation of the Swiss second pillar with a view to reducing the full coverage requirement. Some of the arguments proffered are truly surprising: foreign investments are used as evidence of an over-abundance of capital. Unsurprisingly, the authors conclude that there is no indication for too much saving and that it is reasonable to maintain the full coverage requirement.

2007 asset allocation survey

Mercer IC published its periodic asset allocation survey of European pension funds. Of the 651 funds surveyed, 75% still reside in the UK, thus the survey's cross country comparison may not be entirely reliable (via VF).

Cognitive dissonance in Germany

The cognitive dissonance refers to the results of the Fidelity REAL Index, a survey and comparison between effective and estimated retirement provisions in Germany. Whereas the Germans surveyed expect to achieve 70% of their final gross household income upon retirement, they will effectively only make 56%, which reveals a substantive gap between reality and expectations. Other interesting conclusions are available in the Executive Summary in English and the full brochure in German (both made available here with Fidelity's permission).

Similar surveys are currently being conducted in the UK and France. Watch this space.

Financial investments in commodities

Commodities investments have caught the supervisory eye, it seems. In its latest Quarterly, the BIS published interesting research about Financial investors and commodity markets. Specifically, it addresses the questions whether the exploitation of perceived profit opportunities by financial investors has fundamentally changed the relationship between prices and the physical characteristics of commodity markets and whether the broadening of the investor base has led to significant market deepening and hence affected features such as short-term price fluctuations.

The latter question is answered quite in the affirmative, while the former is more difficult to address. The BIS notes a significant divergence of long-dated futures prices (in crude oil and copper) from estimates of current marginal production costs since 2003. In efficient markets, expected marginal costs should act as anchors for long-dated futures prices. However, the research offers several fundamental reasons for such divergences, hence they are not necessarily a consequence of portfolio investments.

Annuities: a private solution to longevity risk

Its title may appear a bit facetious, but the latest issue of SwissRe's Sigma is anything but. It contains a comprehensive overview of the challenges to capital based retirement provision arising from increasing longevity. The prime focus of the publication is on insurers and insurance products, naturally, but most of its considerations and precepts are directly applicable to non-insurance pensions providers. A very worthwhile read for everyone in the retirement business!