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Regulation

ECB proposal could put added burden on funds

Klaus Stiefermann said the regulation would add costs for German funds.

Pension funds and money managers would face additional paperwork from the European Central Bank under a proposed regulation that would compel them to report their assets and liabilities starting with 2018 data, industry sources said.

Industry sources said they fear the proposed regulation could end up contradicting existing directives that govern pension funds in the European Union and would ultimately give regulators a new mandate to impose capital requirements on pension fund investments.

The potential cost of the new regulation is another concern.

In its current form, the ECB regulation would require pension funds to report their holdings security by security, starting with 2018 annual data. Although primarily aimed at pension funds, the ECB has the authority to ask money managers to provide the data on behalf of eurozone-based asset owners if those owners are unable to produce the data themselves, according to the ECB website.

It also would require funds to separately report defined benefit and defined contribution assets.

Pension funds had until Sept. 29 to mold the incoming reporting requirements through an industrywide consultation, which the ECB had been conducting since July. A final version of the binding regulation is to be sent to the governing council of the ECB by December, and the council is expected to approve the proposal by year-end, the ECB said.

Cost concerns

Although the ECB has issued assurances the regulation is to benefit the stability of the eurozone's monetary system, a number of European pension fund associations raised concerns about the costs.

"In consequence of the new reporting requirements, internal operative expenses for German pension funds will rise and new IT modules or programs will become necessary (and will incur) additional costs," said Klaus Stiefermann, CEO at Arbeitsgemeinschaft fur betriebliche Altersversorgung, the German occupational pension funds association in Berlin. AbA represents 174 pension funds with €174 billion ($207.7 billion) in assets.

Gerard Riemen, managing director at Pensioenfederatie, the Dutch pension association based in The Hague, which represents 220 retirement funds with €1.1 trillion in assets, added: "It is not desirable that pension funds must hire a provider to harvest the data. The funds then have no other option but to pass these additional costs on to their participants."

The key sticking points associated with the incoming regulation are the formula by which pension funds will be calculating and reporting liabilities to the ECB, and the frequency of the reporting, pension fund executives said during a public hearing on the regulation held by the ECB on Sept 21.

While most pension funds in the eurozone now report data annually to domestic regulators, the draft regulation on the ECB's website stipulates, that starting in 2019, pension funds will be expected to provide the data quarterly.

Consultants present at the hearing voiced concerns that adhering to new pan-European rules will incur unwanted costs associated with producing the data more regularly. And because domestic reporting rules vary across the eurozone, pension funds fear that they will be expected to aggregate data in unfamiliar ways. Asset owners highlighted at the hearing that some jurisdictions might feature more advanced practices, such as in the Netherlands, where market-based valuations of liabilities are conducted.

But ECB officials said during the hearing that asset owners will be expected to report liabilities according to established models in their respective member states to national central banks and supervisory authorities, which then will provide the required quarterly updates to the ECB.

To collate and streamline the data of occupational pension funds, the ECB teamed up with the European Insurance and Occupational Pensions Authority, which supervises occupational pension funds in the eurozone. But sources said the reporting templates expected by the two institutions vary, too, and could be a source of additional work.

"Even though the intention was to coordinate the reporting requirements between the ECB and EIOPA, we doubt that the objective of consistent reporting requirements which avoid double reporting and limit the related costs will be achieved," the AbA's Mr. Stiefermann said. For example, pension funds in Germany will have to report three different sets of data: to the national regulator, the EIOPA and the ECB, he said.

"A different breakdown and a different format for each reporting requirement mean that extra work will be needed," he added.

A heap of regulation

Since the global financial crisis, a number of new actors have entered the pension regulatory universe in Europe, including the Financial Stability Board and the EIOPA.

"These new actors should not, however, expect pension funds to pay external providers or money managers to help obtain the data," said Matti Leppala, CEO and secretary general at PensionsEurope in Brussels, an organization that protects the regulatory interests of occupational pension funds in Europe.

According to sources, the ECB's regulation could pave the way for EIOPA to bring back its plans to introduce a Solvency II-type regulatory framework along with capital requirements, something that pension funds successfully fought off during the European Commission's Institutions for Occupational Retirement Provision directive review in 2015.

Solvency II requirements were originally designed for the insurance industry, where investors face higher capital charges on certain asset classes.

Christian Lemaire, global head of retirement solutions at Amundi in Paris, said data reporting is needed, but it is important not to go back to the Solvency II framework because the regulation could make investing in equities or real estate more expensive due to capital requirements.

During the public hearing, ECB officials reiterated their intention is to collect the data for monetary policy decisions as well as for "pension funds themselves." But the central bank and markets regulator has yet to clarify how the pension funds will benefit from the regulation.