The financial crisis originated from financial institutions investing in toxic credit instruments with excessive borrowing. Credit default swaps also gained considerably in popularity in the years preceding the crisis. Especially banks and insurance companies appeared to have considerable appetite for risk-taking. The potential gains enhance shareholders’ profits, but the downside risk is borne by depositors/policyholders or the state.
Pension funds have not been immune to the turmoil. The fall in asset prices has eroded funding ratios (DB plans) and capital values in individual accounts (DC schemes), which will translate into higher contribution rates and/or lower retirement benefits. But state pensions are likely to be negatively affected, too. The recession has resulted in a sharp rise in government budget deficits and the billions of euros allocated to bailing out banks and insurers have increased public borrowing. This will exert further pressure on the long-term sustainability of public pay-as-you-go schemes.
The crisis has exposed deficiencies in financial sector regulation and supervision. The European Commission has embarked on a comprehensive programme for financial market reform.1 The proposed reform package is to a large extent based on the report of the High Level Group chaired by Jacques de Larosière.2 It is clear that pension funds and their stakeholders have a substantial interest in adequate financial sector regulation.
The financial crisis has also reinforced EFRP in its view that workplace pensions are essential to secure future retirement income. The governance structure of pension funds in most member states is such that incentives for excessive risk-taking to accomodate shareholders are absent. Pension funds do not employ financial leverage nor do they engage in speculative derivative positions – practices that are even strictly prohibited by the IORP Directive.3
See also:
EFRP Response – EU Commission Consultation on the improvement of supervision for the financial services sector – April 2009
EFRP Response – EU Commission Consultation on hedge funds – January 2009
1 Please refer to the European Commission's website on financial services for a complete overview
2 Report of the High Level Group on financial supervision, 25 February 2009
3 Directive 2003/41/EC, 3 June 2003 on the activities and supervision of the institutions for occupational retirement provision, OJL 235, 23/09/2003, pp. 10-21
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