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12 April 2018

CEPS - Fostering Institutional Investment in Europe’s Capital Markets: Reality vs. Expectations

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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.

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.

Full document

© CEPS - Centre for European Policy Studies

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