Commodities investing

The UK Financial Services Authority has just issued a paper about risks and challenges in the growing commodities investment segment. Most of the paper is a wrap-up of conventional wisdom, but it is nevertheless worth mentioning that the FSA recognises the wide use of algorithmic trading (with associated technical risk) and that, surprisingly, UK pension funds are barely invested in this asset class to date. Consequently, the consensus view is that the growth of portfolio investment in commodities is set to continue.

Regulatory risk in Poland

Sometimes, Poland can be a confusing country, especially when it comes to pensions. Therefore, it is valuable to have the occasional helicopter view paper, such as the IMF's recently published Technical Note on Competition & Performance in the Polish Second Pillar. The paper contains a description of the structure & function of the Polish retirement provision system in general and the second pillar in particular. That's where appearances can be confusing: The Polish second pillar is evidently not equivalent to occupational pensions in the sense of the Pensions Directive, which is why the Directive's investment guidelines are not directly applicable. Nevertheless, the systemic home bias of the Polish second pillar remains an issue, probably even a self-reïnforcing one thanks to the considerable asset accumulation in the industry. epn also has an interesting piece covering that issue.

Polar pensions

IPE reveals that Iceland is the latest (and last) EEA country to adopt the Pensions Directive into its national body of law. It will be interesting to observe how Iceland proceeds with the transposition given the Belgian example. The Icelandic Association of Pension Funds will certainly provide more background.

Mortality assumptions

Today, the 7th Annual Conference of the IEBA has been brought to my attention because of its several presentations about pan-European pension funds (scroll down to Past Events).

While the presentations themselves did not strike me as out of the ordinary, I noticed the slides of an earlier event about mortality assumptions used in the EU. The slides present a good overview of this important paper. Most notable is the slide shown on the side. It displays the difference between observed and assumed future life expectancy of pension scheme members across a number of countries. The difference varies widely with Denmark, Switzerland & Germany showing the slightest differences whereas France, Spain and Ireland have the most "longevity reserves" built into their mortality assumptions: a plan using French mortality assumptions will show considerably higher liabilities than the same population of beneficiaries subjected to Danish assumptions.

Global institutional investors

The Committee on the Global Financial System hosted by the BIS recently published a paper on "Institutional investors, savings and asset allocation". This paper tries to assess the impact of ongoing regulatory and accounting changes on the behaviour of institutional investors, whose assets under management are seen as rapidly catching up with those of the banking system, therefore warranting central banks' interest with a view to the stability of the financial system. The impact of regulatory changes on market rates and asset prices is another important consideration. The report's main theme is the ongoing transfer of risk from institutional balance sheets to the household segment.

Two side notes on Swiss pension funds: Available information about their assets & allocation is two years older than other countries', and their equity exposure is considerably below average.