On Monday the European Private Equity and Venture Capital Association (EVCA) warned regulators that new risk capital rules for the continent’s pension fund system could scupper investment in long-term asset classes such as infrastructure and private equity.
In a consultation submission to the European Insurance and Pensions Authority the EVCA argued the proposed reforms favour liquidity over capital at risk. As long-term investors, this could make it difficult for pensions to meet liabilities as they fall due, the EVCA cautioned.
Rules that push pension funds towards too much short-term holdings in the portfolio can increase portfolio risk, which is the opposite of policymakers’ intentions
The EU government is considering using the incoming Solvency II directive, which covers European insurers, as its template for pension funds. The industry has criticised the way Solvency II models private equity risk, arguing regulators have created a confused distinction between listed and unlisted private equity assets. Further objections relate to whether Solvency II sufficiently acknowledges the benefits of a diversified portfolio with long-term private equity holdings.
The proposals could have significant implications for GPs’ fundraising efforts. Between 2006 to 2010 pension funds accounted for some 36 percent of all capital raised by EU-based GPs, according to EVCA stats.
Karsten Langer, EVCA’s chairman, said in an interview he hopes policymakers will take a sympathetic view to industry concerns as rules are drafted over the next two years. “They should understand pension funds are different from insurance firms or banks and deserve their own tailored rules. In fact rules that push pension funds towards too much short-term holdings in the portfolio can increase portfolio risk, which is the opposite of policymakers’ intentions”.