GLOBAL – A pension fund's ability to commit to long-term investments should not rely excessively on a project's assessment by credit ratings agencies, the OECD has warned.
Publishing a draft of its high-level principles for long-term investing after both the European Commission and UK examined how to encourage long-term investment, the think tank said any regulatory framework should be mindful of drafting risk-based solvency rules in such a manner that they take account of the liability-matching advantages pension funds gain access to by investing in certain long-term assets.
The principles, put out to consultation late last week, also call on governments worldwide to publish detailed pipelines of coming infrastructure projects and recommend countries consider the introduction of guarantees or first-loss provisions to allow for a "more appropriate" allocation of risks between the private and the public sector.
The OECD stressed the importance of a well-designed regulatory framework to encourage all institutions with a long-term horizon to invest in longer-term assets.
"The framework should also consider the investment horizon of these investors, while promoting their soundness and solvency as well as broader financial stability and consumer protection," it said.
"Excessive or mechanistic reliance on external information providers (such as credit rating agencies) should be avoided."
The draft document further said that solvency-based regulation should "aim" to be countercyclical and ensure that a pro-cyclical approach to investment is not encouraged by any regulatory guidelines.
It further highlighted the importance of reliable data in attracting new investors to a market, suggesting the promotion of detailed data collection would improve how well any long-term markets function, as well as liquidity.
However, the OECD stressed that institutions needed the right governance structure in place before making long-term investments.
"The governing body should ensure the institution can properly identify, measure, monitor and manage any risks associated with long-term assets, as well as any long-term investment risks – including environmental, social and governance risks – that may affect their portfolios," it said.
It further endorsed an active shareholder approach, saying entities managing long-term assets should make an "informed and effective" use of its rights as shareholder rights, always acing "in consistency with those fiduciary rights".
Stakeholders wishing to comment on the principles should contact the OECD by 24 May.