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Framework Needed For Long-term Investing


Despite the advantages of long-term investing, governments, regulators, investors, and others will not take a long-term view without the right frameworks in place, say a commentary from six Canadian pension plan on the draft ‘OECD Principles of Long-Term Investment Financing by Institutional Investors.’ The six ‒ the Canada Pension Plan Investment Board, the Ontario Teachers’ Pension Plan Board, the Ontario Municipal Employees’ Retirement System, the Caisse de dépôt et placement du Québec, the British Columbia Investment Management Corporation , and the Alberta Investment Management Corporation ‒ say, however, rather than becoming too prescriptive, the OECD should outline a few broad principles and provide guidelines on how the principles may be implemented by policymakers, regulators, and investors to accommodate their different circumstances and objectives. Their commentary categorizes the preconditions for long-term investments into two broad categories: investor related concern over the emphasis on regulations and policies to promote long-term investments and investment related concern to promote and facilitate a favourable environment for long-term investing. For the former, they suggest, for example, regulators and policy makers should emphasize the need for sound risk management practices and capabilities while promoting strong governance practices at both the investor and investment (company or asset) level. Increased reliance on the prudent person principle, applied to managing assets in the context of meeting liability obligations, will be more effective at curtailing impediments to and thereby promoting long-term investing than will increased regulation. Policies and regulations should also aim to strike a balance between solvency or filing requirements, where valuation focuses on current market value, and the economic benefits of holding investments which are intended to be held for the long-term, regardless of the current market environment. Rather than intervene with more regulation or policy, it is important to first examine if there are existing impediments that prevent markets from being able to allocate capital efficiently and if so, remove such inefficiencies. There is also a need to take a holistic view on regulations considering potential unintended consequences. To increase long-term investments, policymakers and regulators can help establish favourable environments for institutional investors by increasing the certainty of after-tax, real cash flows over the investment horizon. There is also a need for an adequate supply of long-term investments, particularly inflation-indexed bonds.

Courtesy of Benefits and Pensions Monitor website News Alerts

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