Institutional Investors and Long Term Investment Juan Yermo Financial Affairs Division Directorate for Financial and Enterprise Affairs

Outline I.What do we mean by long-term investing and why does it matter? II.What are the barriers to and trends in long- term investing? III.What are the potential policy solutions to promote long-term investing? IV.What is the OECD doing? 2

I. Long Term Investment Strategies “Patient” capital: –Long-term / illiquidity premia, lower turnover, less procyclical investment strategies  higher net returns, greater financial stability “Engaged” capital: –Active voting policies  better corporate governance “Productive” capital: –Support for infrastructure development, green growth initiatives, SME finance, etc  sustainable growth 3 What does long-term investment mean and why does it matter?

Long-term Investors 4

Long-term Investments 5 Source: World Economic Forum (2011)

II. Trends & barriers in LT Investing: 6 Short- termism Risk transfer to households Valuation and regulatory effects Governance and investment incentives

Shorter investment holding periods 7 Source: OECD (2010) Holding periods in major stock markets

Growing myopia over future income 8 Source: Haldane and Davies (2011) Short-termism indicator: shareholders discount future cashflows by an additional 6% - “x” parameter in Haldane and Davies (2011)

Trends in pension fund allocation 9 Declining equity allocations in some countries (e.g. UK, Netherlands) Less than 1% of their assets in “unlisted” infrastructure, over 2% in hedge funds Private equity mainly LBO-driven, little venture capital Growing appeal of ETFs and other liquid investment vehicles

III. Policies to Support LT Investment Build expertise – appoint more knowledgeable pension fund trustees Forster collaborative strategies – pooling to allow for scale investments (share risk and knowledge)/ collaborate to share corporate governance oversight costs Check prudential regulation – avoid unintended misalignments pushing institutional investors into a short-term focus Supervisory oversight – investigate firms with high turnover etc. 10 Reform Regulatory Framework for Institutional Investors

Policies to Support Long Term Investment Regulatory support – check no barriers (take over issues etc.)/ practical help (electronic voting) or compulsion (disclose voting policies) / multiple voting rights? Collaboration and professional services – e.g. ICGN/ PRI initiatives / proxy voting services Guidance on behaviour expected – Stewardship codes Supervisory guidance and accountability / disclosure over LTI 11 Encourage Institutional Investors to be active shareholders

Policies to Support Long Term Investment Supportive tax policy and policies to promote long-term investment – tax policy on debt vs. equity /FDI policies Government issuance of long-term instruments – long-term inflation linked bonds/ longevity bonds? Transparent environment for infrastructure – long-term policy (including on environment)/ data collection/ suitable investment vehicles (PPP)/ risk mitigation mechanisms 12 Government support for long-term investments

Policies to Support Long Term Investment Appropriate financial consumer projection framework – transparency/ redress mechanisms Tailored financial education and awareness strategies and programmes – explain benefits of long-term investing Default mechanisms – life-cycle strategies 13 Financial education and consumer protection regulation

IV. What is the OECD doing? The purpose of this project is to investigate ways to encourage and assist institutional investors (particularly pension funds and insurance companies) to act over longer-term periods. Drawing on expertise across OECD (Directorate Financial Affairs / Corporate Governance/ Tax/ Environment etc.) 14 Long-term Investment Project

OECD Long-Term Investment project –Monitoring LT Institutional Investors: GPS, GIS data collection –Research papers Pension Funds and Investment in Infrastructure; Pension Funds and Green Growth; Life Insurance & Infrastructure Investment; The Emerging Market perspective on Institutional Investment in Infrastructure; Impact of Solvency Regulation and Accounting Standards on Life Insurers’ and Pension Funds’ Investment Strategies; Institutional Investors and Corporate Governance. –Dissemination through a series of high-level meetings and conferences – bringing government representatives, regulatory community, investors together 15

Further OECD information private pensions webpage - OECD Working Paper series on Finance, Insurance and Private Pensions - OECD long-term investment project webpage