Bank of England looks at pension fund procyclicality

The Bank of England’s Procyclicality Working Group, which consists of various pension and investment experts under the chairmanship of Andrew Haldane, has published a discussion paper on procyclical behaviour by pension funds and insurance companies.

The paper looks at trends in long-term investing by pension funds and insurers, and whether they provide a stabilising influence, by acting against economic cycles, or whether they are becoming more procyclical and potentially destabilising. In the latter event, market behaviour, regulation and accounting standards have been cited as possible factors causing procyclical trends.

The paper finds some evidence of procyclical behaviour by insurers, such as selling equities following the dotcom crash in the early 2000s. It also found that DB pension funds have acted countercyclically in the short term, but a medium-term de-risking trend has dominated. This has contributed to a lower share of UK equities being held by pension funds and insurers, falling from over 50% in the 1990s to just over 10% in 2012. The working group said that although the paper does not present policy conclusions, one conclusion to be drawn from it is that policymakers should consider the impact of trends at insurers and pension funds on financial stability and the macroeconomy.

Members of the working party included Ronnie Bowie at Hymans Robertson, Roger Gray at USS Investment Management and Mark Hyde-Harrison from the NAPF.