EID: Eiopa alarmed about low corporate bond returns
“What’s important is to understand well the risks that are being taken, and to manage infrastructure investment well internally or externally, whether greenfield or brownfield investments. A suitable investment committee or board is needed that is responsible for investments if management is outsourced,” said Manuela Zweimueller, Eiopa’s ( European Insurance and Occupational Pensions Authority ) senior advisor for international affairs.
Zweimueller noted that, under the Solvency 2 reform, Eiopa is looking into the way in which equities are treated in equity capital for insurance companies. In her view, when investing for the long term, infrastructure could represent a good match with long-term liabilities, as well matched assets and liabilities is one of the fundamentals of Solvency II.
There is also liquidity stress, which must guarantee that, in the event of market stress, there are always liquid assets available. Eiopa is also thinking about a component linked to volatility adjustment in general, but, for the moment, “I don’t think that we will modify risk-related charges for infrastructure investments.”
Asked about whether risk was being fairly remunerated in infrastructures, Zweimueller said it was not her role to comment on prices but that she did think that, generally speaking in the credit universe, bonds issued today are remunerated less than two or three years ago, even at equivalent risk. “This is something that alarms us”, she added.
As to whether ESG-based infrastructure investments could receive a bonus in terms of capital charge or non-ESG-based ones, a malus, she said that, as a regulator, she was not sure this is such a good idea, as regulators’ role is not to steer investors towards one sector or another. She believes that pressure from investors and activists is already relatively efficient in this area.
“The infrastructure market is in the hands of five large companies in Germany. They are affiliated to a bank and, hence, there is no competition, something that squeezes infrastructure returns. Moreover, these five companies have the market’s best lawyers”, said Bernd Merz, assistant to the head of prevention department at BG BAU, and board member of AEIP and the ISSA Construction Section.
“Investments in infrastructures are indeed highly challenging. Each country has its own policies and own regulations. In Germany, for example, a new motorway takes at least 10 years to see the light of day. In Belgium or elsewhere, all the ins and outs of projects have to be understood. Not to mention the fact that there are no international standards in contracts. Each contract is unique. … So you need to have infrastructure experts around you and attorneys who are familiar with the issue to know all the details of each project,” said Thomas Jesch, managing board member at BII.