Anxiety over the health of pension systems is spreading beyond the UK. According to news reports, including the Financial Times, officials from De Nederlandsche Bank, the Dutch central bank and pensions regulator, have contacted counterparties in the pension system to assess their liquidity status, and evaluate any need for offloading of assets along the lines of the fire sales executed by UK pension funds.
Meanwhile, Jan Mark van Mill, head of treasury and trading at APG, the leading Dutch pension fund with almost US$550 billion under management, has called for the European Central Bank to guarantee the repo markets where they can exchange illiquid collateral for cash.
The pension system of the Netherlands, the largest in the European Union with some $2.1 trillion under management, is regarded as structurally similar to the UK’s in some important respects, including use of leverage. In public statements after the UK debacle, the Dutch central bank has emphasised the lessons in terms of adequate liquidity management.
Earlier this year, Klaas Knot, the central bank’s president, in his capacity as the current chair of the Financial Stability Board, issued a stark warning about the risks of leverage and liability mismatches at non-bank financial institutions, including pension funds.
This comes as Paul Marshall, co-founder of Marshall Wace, a $62 billion hedge fund, warned that central banks bore much of the blame by keeping interest rates artificially low for years in an effort to unwind the damage done by the global financial crisis. “The UK LDI [liability-driven investment] industry is the first casualty of the end of the ‘money for nothing’ era – the first dead fish to float to the surface as rising central bank interest rates act like dynamite fishing in global asset markets,” he stated in a letter to clients reported by Bloomberg.
The British Telecom pension scheme, one of the UK’s largest, is estimated to have lost over $12 billion in assets in the debacle.
Meanwhile, the International Swaps and Derivatives Association has called for a system to allow pension funds to more effectively convert collateral into liquidity to meet margin calls from derivatives. A sceptic might point out the group would consider such a system preferable to pension funds being banned from using derivatives.
There was also a call some while back from Conservative politicians in the UK for pension funds to unlock their coffers to help fund national growth, including a new structure called the Long-Term Asset Fund designed to attract capital from long-term investors like pension funds into growth-generating private assets. That project now looks as dead in the water as the Conservative government itself. And the spillover damage and anxiety of the pensions flashfire looks likely to run for quite some time yet.
