EDHEC Assesses the Impact of Regulation on the ALM of European Pension Funds

A new study produced by the EDHEC Risk and Asset Management Research Centre, entitled ‘Impact of Regulations on the ALM of European Pension Funds’, analyses the impact of prudential and accounting constraints on the asset-liability management (ALM) of European pension funds in the Netherlands, the UK, Germany, and Switzerland.

The two main findings of the report are:

  1. The retirement system would be more stable if regulators were more willing to tolerate short-term risk. . The challenge for the regulator is to take a long-term approach to regulation because specific attention should be paid to the long-term nature of pension funds. Traditional pension liabilities have low short-term replicability, and risk-free long-term strategies involve short-term risk. As a consequence, and because of their role in providing very long-term benefits, the increasing focus on the short term is worrying for pension funds.
  2. Pension funds should build internal models for their risk management strategies. The idea that risk management is best reflected in an internal model is especially relevant for pension funds; after all, no standard formula can capture the diversity of the pension landscape and the variety of protection mechanisms.

“In a context in which accounting standards and prudential regulations are tightening, requiring greater attention to the volatility of the surplus and less tolerance of underfunding, our report calls for an improvement in ALM strategies and the use of state-of-the-art models – such as dynamic liability-driven investments – for the design of these strategies,” said Noël Amenc, director of the EDHEC Risk and Asset Management Research Centre.

Erwan Boscher, head of ALM Solutions, AXA Investment Managers, said: “AXA IM’s experience with pension funds and corporate sponsors show that, at a time where credit markets are stressed, short term accounting volatility can create unnecessary strains on balance sheets that does not match the long term nature of pension liabilities. Therefore the conclusions of the study are in line with our field experience.”


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