This year has seen the debate about long-term versus short-term institutional investing resurrected via both the hotly-anticipated findings of the UK’s Kay Review and the launch by the Paris-based Organisation for Economic Cooperation and Development (OECD) of a wide-ranging research project on the way the world’s $65 trillion of savings assets are invested. The former, formally titled: UK Equity Markets and Long-Term Decision Making, headed by respected economist Professor John Kay, will deliver its final report in July after outlining interim findings earlier this year in February: Link
The latter OECD initiative was kicked off in Paris earlier this year at a conference, organised by the World Pensions Council think-tank, and attended by representatives of some of Europe’s largest pension funds, including the UK’s Universities Superannuation Scheme, the Netherlands’ ABP and Denmark’s ATP national pensions scheme. At the event, the OECD warned that many pension and endowment funds had become too short-term and market-focused in their outlook as a result of a mix of regulation, accounting standards and the move away from collective defined benefit (DB) pension plans and towards individual defined contribution (DC) plans.
Speaking to Responsible-investor.com, Juan Yermo, Head of the OECD’s private pensions unit, said its Long Term Investment Project (LTIP) project started with a paper prepared at short-notice for the G20 meeting in February 2011 in Cannes, France. Thatdiscussion culminated in the decision to launch the LTIP, Yermo said: “Because of the worrying trends we outlined, we were charged to establish this project to facilitate long-term investing. We will collect data, take opinions and end with making recommendations at the highest political level.”
Importantly, the Paris event led to a significant meeting of asset owners with senior OECD figures, including deputy secretary general Rintaro Tamaki, to talk about the real-world barriers to long-term investing and to discuss further co-operation. Yermo says these barriers include investment restrictions, prudential regulations and the issue of government guarantees for more difficult strategic, long-term investments such as infrastructure and renewable energy. Says Yermo: “Long-term investing has been on the policy agenda for a while and one of the things that really needs looking at are the regulations that stipulate how pension funds, insurers and banks can invest to see if there are problems with that.”
However, he notes that neither investors nor the OECD want to be in a situation where governments are “twisting arms” and forcing investors into projects that are not profitable: “What we do want to do is find good investments with attractive risk/return profiles and for governments to be implementing clear, long-term rules and incentives if necessary. There is a need for more illiquid long-term investment, but we also have to deal with problems of market volatility, competition between asset managers based on short-term measurement, and,
of course, the issue of illiquidity itself.” He says the OECD’s work is to join the dots from previous programmes, many of which have included elements of the current programme. Last year, for example, the OECD, issued a report urging governments to introduce policy that is “loud, long and legal” to boost investment in green assets by global pension funds: Link to report
The LTIP, which will run through 2012 and 2013, will focus primarily on what policymakers can do to promotethree key areas: investment in infrastructure and “green growth”, responsible investment and good corporate governance, and the financing of small businesses and entrepreneurs, for example through venture capital.
Yermo says there has been significant interest from institutional investors: “We hope to have investors at the heart of the discussion in order to help us create a fruitful debate on how to channel these funds towards productive assets.”