ERAFP Chief Executive warns against low interest rates

CEO of France’s biggest public pension fund has advised that the European Central Bank’s choice to maintain low interest rates could jeopardise many large pension schemes.

Chief executive of ERAFP, Philippe Desfossés, who manages France’s €24bn pension scheme for civil servants, has said “many pension funds in Europe will implode over the next two to three years” if the central bank’s continues its low interest rate policy.

The ECB has already infuriated politicians, banks and insurance firms throughout the EU after it decided in April to keep its benchmark interest rate at zero. The deposit rate on lenders’ reserves kept at the central bank have also been kept at -0.4%.

The ECB’s unconventional fiscal policy is “weighing heavily on the pension fund industry”. Mr Desfossés believes it has gone unnoticed as politicians have been preoccupied with the challenges facing banks and insurers, “even though the risks facing pension funds are continuing to grow”.

Chief executive Larry Fink of BlackRock which is the world’s biggest asset management firm, said in April that there has not been enough consideration with regards to the impact of negative rates on individuals’ saving habits.

Meanwhile, senior executives at the International Monetary Fund equally agreed that whilst low interest rates have been useful for spurring economic growth, “there are limits on how far and for how long negative policy rates can go”.

President of the ECB, Mario Draghi, defended the low interest rate policy from criticism last week, claiming that challenges to the central bank’s independence would affect confidence in the eurozone’s recovery.

Mr Desfossés recognises that the ECB is facing a “Siberian dilemma”, which is a term used by the military to describe a situation where none of the potential options offer an attractive solution.

But he is advising the central bank to acknowledge and address the issues that are of increasing concern for Europe’s pension funds. These problems have been worsened by the ECB’s bond-buying programme, which consequently caused government bond yields to drop throughout Europe.

Since the start of 2014, interest payments on French 10-year government bond yields have slipped from 2.5% to 0.46%, which is significantly lower than the rate of return that ERAFP aims to achieve on behalf of retirees.

“If I buy French bonds today, not only does this fail to generate returns, but I destroy the wealth of the pension fund. French bonds pay less than the rate I implicitly guarantee to ERAFP beneficiaries”, said Mr Desfossés.

“If I want to fulfil my fiduciary duty, I just cannot justify buying them”, he added.

His pension fund plans to increase its exposure to equities and property in order to boost returns.

However, the CEO also disapproves of regulatory constrictions that prohibit pension schemes from buying riskier assets, such as stocks, private equity and infrastructure, for which he is asking regulators to relax these rules.

If you need pension advice in France, contact deVere France today!