Michel Barnier said European pension funds can help address the challenges of an aging population and investments to create long-term growth.

EC continues to look to pension assets for growth

Commission not giving up eyeing fund coffers for long-term needs

The European Commission has reinforced its message that pension funds in Europe are the key to financing long-term growth in the region.

Commenting on the release of a package of measures that aims to identify sources of long-term financing and sources of support for economic growth in Europe, Michel Barnier, commissioner for internal market and services, said in a statement: “All European societies face a combined challenge of provision for retirement against a backdrop of an aging population, and of investing long term to create growth. Occupational pensions are at the junction of these two challenges.”

Mr. Barnier cited the e2.5 trillion ($3.4 trillion) in European pension assets that could be put to use to foster long-term growth.

The measures outlined by Mr. Barnier focused on investment needs in Europe across infrastructure, technology and human capital.

The proposed changes in the Institutions for Occupational Retirement Provisions Directive are intended to contribute more to long-term investment, according to a statement on the European Commission website. They are designed to ensure pension fund participants are protected against risks, to remove obstacles to cross-border funds and to reinforce the capacity of occupational pension funds to invest in financial assets and finance growth in the economy.

To encourage funds to invest long term in growth, environment and employment-enhancing economic activities, the proposal “would modernize investment rules to allow occupational pension funds to invest in financial assets with a long-term economic profile,” according to an extensive frequently asked questions file published by the commission.

“The proposal would change the existing provisions on investment restrictions to make sure occupational pension funds remained free to invest in infrastructure, unrated loans, etc., thus ensuring that investments, in particular with a long-term profile, should not be restricted if the restriction is not justified on prudential grounds,” according to the FAQ.

It had been hoped the commission would remove obstacles that stand in the way of creating cross-border pension funds. In documents leaked over the past month, it seemed commissioners had removed one particular barrier — a requirement that cross-border plans had to be fully funded at all times. Some executives in the U.K. pension industry said removing that requirement would create scale for multinational companies, potentially improving governance and leading to bigger asset allocations to money managers.

However, the published proposals do not remove the requirement.

In an e-mailed comment to Pensions & Investments, a commission spokesman said: “There are no changes for cross-border funds in new text. Status quo remains. That means that cross-border pension funds need to be fully funded at all times. Whereas national pension funds don't have to be.

“(The) reason is twofold: the revision of IORP is not about funding, so it makes little sense to deal just with one element of funding. And although we are not asking pension funds to increase their funding at this stage, we don't think it makes sense either to encourage them to weaken existing funding requirements: (it is) not in line with the general movement to improve prudential soundness.”

"Hamper willingness'

The decision not to alter the rules comes amid the commission's own observation that unchanged rules “would hamper (institutions') willingness to engage in cross-border activities,” according to its impact assessment on IORP II, published March 27.

“On cross-border pensions we are disappointed,” said James Walsh, policy lead-EU and international, at the National Association of Pension Funds, based in London. “We think it is a missed opportunity — the European Commission could have taken the chance to ease the funding of the cross-border schemes, in a step towards strengthening that market.”

“I think it is certainly the case that out of the 50,000 IORPs in the U.K., a few of those would be interested in operating across borders,” said Mark Dowsey, Birmingham-based senior consultant at Towers Watson & Co. “But what we have is a not-insignificant number of multinationals for whom consolidating they pension provision across Europe would be a very attractive option.” However, he said the full funding requirement was one of the obstacles.

But some were never convinced that removing the full funding requirement would have a big impact anyway.

“Pension funds are affected by local law and it is very difficult to map all the local laws into new pension funds,” said Urs Roth, principal consultant at business consultancy Capco, headquartered in Frankfurt, Germany. He said there were 14 cross-border IORPs between Ireland and the U.K. in 2008 — and still 14 in 2013. “It may be possible to pool assets. But I think we have a lot of small and local pension funds and they don't have the chance to pool, and big ones that might pool the assets have already done it in some way, by having a common asset manager, for example.”

And whether funds would want to subject members in other markets to deficits is a questionable element too. “If the European Commission had removed the full funded requirement then it is hard to imagine which schemes would have wanted form cross-border pensions - there would be little incentive for members to merge with another scheme whose level of funding was worse than their own,” said Paul Sweeting, London-based European head of the strategy group at J.P. Morgan Asset Management (JPM). “However, it does mean that any new cross-border schemes are going to be inclined towards very low risk asset allocations, as that is the only way to guarantee full funding. But not removing the requirement was the main surprise in the directive.”

The commission's answer to removing barriers around cross-border pensions revolve around increased transparency and governance procedures, as well as introducing a pension fund transfer procedure, which will allow for the shifting of assets among European Union member states. It is also proposing a harmonized benefits statement, applicable across Europe. However, Mr. Walsh at the NAPF said while he was in favor of improved communications, a standardized format across the 28 EU member states would be challenging. n

This article originally appeared in the March 31, 2014 print issue as, "EC continues to look to pension assets for growth".