This presentation by John O'Brien, Mercer, was made at the OECD-Risklab-APG Workshop on pension fund regulation and long-term investment held in Amsterdam on 7 April 2014. Discussions focused on: long-term pension investment strategies under risk-based regulation; riskiness and procyclicality in pension asset allocation; and, regulatory challenges for long-term illiquid assets. For more information, please visit: http://www.oecd.org/daf/fin/private-pensions/OECD-APG-workshop-pension-fund-regulation-LTI.htm

1. REGULATORY CHALLENGES FOR LONG TERM
ILLIQUID ASSETS
OECD / APG / RISKLAB WORKSHOP
7 APRIL 2014
John O'Brien
Partner
Dublin - Charlotte House

2. MERCER 108 April 2014
Regulation and real assets
Response to speaker
• Pensions is a very fragmented market in Europe, c140,000 IORPs
• Breaking of the traditional “barbell” approach (listed equities and government bonds) to
investing needed to unlock capital for real assets such as infrastructure
• Sponsor perspective – managing against multiple KPIs and stakeholders not trivial
• Mercer’s 2014 asset allocation study shows a ‘sticky’ 3% allocation to infrastructure
• Can spread earned on real assets justify the governance if portfolio weighting is not high?
– IORP Directive emphasises importance of ‘fit and proper’ going forward
– Regulatory uncertainty in itself eats into governance time
– Diversified growth funds a ‘manageable governance’ response to diversification agenda
– Fitting illiquid assets into a ‘journey plan’ is not trivial for small/medium investors, and
journey plans are increasingly common among underfunded DB arrangements
– Backlash evident in some cases against excessive number of manager relationships
• Our work with pension and insurance clients suggests some key themes:
– Sweating assets in a low yield environment
– How ‘global’ is inflation?
– Diversification often undervalued as a benefit with real assets where focus is on return

3. MERCER 208 April 2014
Regulation and real assets
Response to speaker
• Difficult to completely divorce regulation from mark to market accounting given the existence
of the latter – structural arbitrage
• Regulation can facilitate behaviours – e.g. the UK 2014 budget and its likely impact on the
defined contribution market
• Helpful measures for real asset investing potentially facilitated by regulation:
– Providing confidence in real asset products, incl. fees and transparency
– Evidence insurers would accept real assets (e.g. infrastructure debt) in specie in
annuitisation transactions
– Eligible collateral for derivatives
– Fostering market for secondaries
– Benchmarks and data to help support decision making
– Recognise differences between pensions and insurance, esp. tail correlations when tail
events don’t necessarily trigger “insolvency”
– Nature of funding tests in some countries, e.g. ‘realisable value’ basis for the statutory
funding test in Ireland
– Facilitate capital pooling

4. Mercer (Ireland) Ltd., trading as Mercer, is regulated by the Central Bank of Ireland. Registered Office: Charlotte House, Charlemont Street, Dublin 2. Registered in Ireland No. 28158.
Directors: Tom Geraghty, Tom Brennan and Vincent Sheridan.