The Capital Markets Union (CMU) initiative has set out important priorities in the area of asset allocation, such as increasing retail participation, promoting sustainable investment, and removing barriers to cross-border activities. Capital markets are expected to enhance long-term value creation in the real economy, and institutional investors to play a more constructive role in achieving this overall objective.
This second Interim Report is based on the discussions among the experts present at the Task Force meeting held on 24 October 2017, additional secondary research and targeted bilateral consultations. The main ideas will be considered Final Task Force Report, which will put forward a series of policy recommendations supported by in-depth quantitative and qualitative analysis.
More detailed information about the Task Force is available here.
The capacity of insurance companies and pension funds to fulfil their financial obligations to policy holders and beneficiaries continues to be under scrutiny, with additional challenges posed by the prolonged low yield environment and the path towards normalisation of monetary policy in the near future. Starting from their specific business model, investment decisions are driven by multiple factors, such as assets and liabilities management, product design and mix, financial and economic conditions, risk-return performance, cost optimisation, prudential requirements, accounting rules, tax regimes and technological developments.
Notwithstanding the heterogeneity across companies and/or member states, the portfolios of insurance companies and pension funds remain heavily invested in fixed income, with increasing exposures to higher yielding instruments in recent years. The overall low level of equity must be addressed decisively. Given the specificity of their balance sheets, institutional investors are considered best suited to engage in long-term investment. With the growing importance of sustainability factors, significant changes in their asset allocation and risk-management practices are envisaged.
Amariei, C. (2018). Fostering Institutional Investment in Europe’s Capital Markets: Reality vs. Expectations, 2nd Interim Report of the CEPS-ECMI Task Force on Asset Allocation in Europe, ECMI, Brussels.
Cosmina Amariei is Researcher at the European Capital Markets Institute (ECMI).