Truth or dare?

EDHEC has made available an interesting survey of current European investment practices, comparing actual practice with recent state of the art in the investment literature. It's a feature of such a survey that practice cannot really look all that good since there will invariably be a time lag between conceptual groundworks and practical implementation. But it transpires from the results that practice does not seem to look to finance literature for competitive advantage by implementing the latest innovations, such as how to handle tail risk.

This conservative approach is probably due to a behavioural bias in the investment community to avoid the risk of being wrong and alone, and it is not likely to change anytime soon, what with the bad press that financial innovation has these days. But in true contrarian spirit, I'd like to point you to this insightful praise of financial innovation.

Consult the survey and compare it with your firm's practice for your own private game of truth or dare ...

EFRP opposes legislative review

On the occasion of last month's conference last month, EFRP presented the results of a member survey about the Pensions Directive. The Federation underlines the innovative nature of the Directive and suggests that the legislative review which is planned by the EU Commission for next year is premature since the Directive has not been given enough time after implementation. There are a number of interesting comments on important "details" such as mandatory second pillar, or that there are more than 48 cases of cross-border pension plans as reported by CEIOPS earlier.

Surge in pan-European pensions?

26% of the 323 European pension funds responding to Tower Perrin's recent survey say they're currently considering to create a cross-border plan in the next ten years. The main advantages quoted are cost savings, improved governance / control and risk management. Instead of a fully fledged, complex pan-European plan, respondents are looking to implement piecemeal, manageable individual aspects, taking opportunity of many corporate's eastward shift in operations. (IPE)

Pensions in Central & Eastern Europe

Allianz Global Investors has published a 96-pages comprehensive report about the pension systems and markets in Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia, and Slovakia with individual country profiles. This report is very useful due to the changing landscape in that region of the continent, combined with the unconventional pillar terminology utilised.

2007 asset allocation survey

Mercer IC published its periodic asset allocation survey of European pension funds. Of the 651 funds surveyed, 75% still reside in the UK, thus the survey's cross country comparison may not be entirely reliable (via VF).

Cognitive dissonance in Germany

The cognitive dissonance refers to the results of the Fidelity REAL Index, a survey and comparison between effective and estimated retirement provisions in Germany. Whereas the Germans surveyed expect to achieve 70% of their final gross household income upon retirement, they will effectively only make 56%, which reveals a substantive gap between reality and expectations. Other interesting conclusions are available in the Executive Summary in English and the full brochure in German (both made available here with Fidelity's permission).

Similar surveys are currently being conducted in the UK and France. Watch this space.

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.

Pensions barometer

Keeping in line with the unseasonally mild weather, Aon has published its European Pensions Barometer 2006. The purpose of this instrument is to determine which systems are under the greatest pressure, so that material change is likely to be forced to occur in the medium to long term. Given the omnipresent pressure on fiscal policies, such change will invariably affect labour cost, which is why the results are considered relevant for corporate location decisions.

The five countries with the worst pensions climate are Belgium, Slovenia, Greece, France & Malta with the best three being Denmark, Estonia & Ireland. This ranking is generated using four broad macroeconomic categories, only one of which refers to occupational pensions. The categories are evenly weighted. The low weight of occupational pensions makes sense if seen in the context of the barometer's purpose.

The approach is interesting and expandable. Naturally, individual categories and variables are subject to the authors' discretion, but this type of helicopter view is often useful. Unfortunately, important countries are currently missing from the survey's assessment, such as Switzerland, which is certainly an important potential location, or the new EU members Bulgaria & Romania.

Pensions risk

Mercer HR has a new Global pensions risk survey which looks at the way corporations perceive their pension plans with regards to their risk exposure. It contains a fresh view in so far as it doesn't consider plan coverage, but rather the risk that the sponsoring corporation is exposed to through its plan. Those risks are widely considered significant, with important differences between the US and Europe. Furthermore, a majority of corporations either doesn't know how analysts assess the impact of pensions on corporate valuations, or they think it's done inaccurately.

In the light of forthcoming pensions accounting that is set to better represent economic reality, this survey is relevant. It indicates that the market is already moving in that direction, but possibly also that risks are currently overestimated (or advantages consequently underrated) because of a lack of precise information about corporate pensions exposure and ways to manage it.

P.S. CFO.com has another good summary.