BRUSSELS -- The battle lines are being drawn over European regulation of pension funds.
Pension fund officials argue a fund should not be regulated the same as an insurance company, while insurance industry figures believe pension funds should be subject to the same investment and solvency standards.
At stake are the investment of trillions of dollars in retirement assets and the potential growth of capital markets in the European Union.
But finding a compromise won't be easy. Mario Monti, the European Commission's internal markets commissioner, recently told a conference in Athens: "The definition of a level playing field for life insurers and pension funds will however be difficult to achieve. This will undoubtedly be a key issue in the coming months, at least at a technical level."
Mr. Monti added that responses to the commission's green paper on supplementary pensions, which was issued last June, reveal some EU member states are reluctant to impose EU-wide prudential rules. Financial services firms, however, widely seek EU-wide liberal investment rules and freedom to provide money management services across borders.
Richard Malone, director-retirement policy at Sedgwick Noble Lowndes Ltd., Croydon, England, said, "U.K. pension funds would strongly resist anything that curtailed their freedom of investment choices. They see themselves as quite distinct from insurance companies."
The issues will be aired more fully at a European Commission hearing tentatively scheduled for April 21 in Brussels. The European Parliament also is expected to transmit to the commission its views on the green paper.
A more detailed proposal or communication could follow in September, Mr. Monti said. Pension experts doubt, however, there will be any rapid action, given splintering of views in the European Parliament.
calling for New directive
In comments on green paper, the Brussels-based European Federation for Retirement Provision -- the umbrella group for European national pension associations -- called for a new European directive on pension funds.
The group wants a "product-driven" approach to regulating pension plans, instead of an institution-oriented focus.
EFRP officials maintain a distinction should be drawn between "second-pillar" plans -- largely employer-sponsored and industrywide vehicles -- and "third-pillar" plans, which are sold directly to individuals. Employers are far more sophisticated buyers of financial services than individuals, thus requiring fewer legal protections, they said.
What's more, many banks and insurers offer products to both institutional and retail markets. Regulating all of their business on a combined basis can be confusing. And the continued blurring of the lines between banks and insurance companies can further complicate oversight, experts said.
A new product-oriented directive could regulate second-pillar plans, and could lay out harmonized principles of prudential supervision "proportionate to the scope and volume of activities of the different operators," the EFRP said.
European Commission officials have taken no view on the debate, but they also are concerned about who stands behind pension benefits if the fund or the sponsoring organization goes bust.
Level playing field?
The EFRP proposal is designed to circumvent objections raised by the Paris-based Comite Europeen des Assurances, which represents European life insurers. The CEA wants to apply equivalent investment and solvency standards to both pension funds and insurance companies.
Under the EC's Third Life Directive, member states are permitted to require insurers to match up to 80% of their liabilities in the same currency. Also, solvency requirements force insurers to keep a 4% funding cushion at all times, which force them into a more conservative investment posture. CEA officials would like to level the playing field, making the same rules apply to pension funds and insurance companies. (Indeed, it was the insurers' strong push for an 80% currency-matching requirement for pension funds that resulted the 1994 withdrawal of a previous commission draft pensions directive.)
But pension officials maintain pension funds are nonprofit, socially oriented vehicles. The profit-making motives that drive the insurance industry make solvency rules necessary to protect policyholders, they suggest.
Some observers believe insurance industry officials would like the lifting of solvency requirements. But some think European Union officials are unlikely to accede to such a request. CEA officials didn't respond to requests for comment.
In its written comments on the green paper, the CEA went on record favoring a common EU standard affecting both pension funds and insurers.
Freedom of investment
EFRP officials also favor freedom of investment under a prudent-man standard.
It's critical that pension funds be able to build well-diversified portfolios, throughout Europe and the world, the EFRP response said. Pension funds should be subject to a broad prudent-investor rule, without statutory maximum and minimum limits on investments in specific asset classes.
In particular, pension experts are worried about constraints on investing in equities and foreign assets that exist in many countries. Not only do equities provide the best long-term returns over most periods, but they protect retirees against inflation, they wrote.
"Because equities represent a claim on real assets, investment in equities is one of the most important tools in investment strategy for ensuring that the level of retirement income of retired people keeps up with inflation," wrote the U.K.'s Institutional Fund Managers Association, London.
IFMA officials also warned that capping equity investment inhibits pension fund behavior.
In particular, such limits encourage trustees to hire managers with bond expertise and are more "hesitant" to allocate money to stocks, according to the IFMA response. Limits also have a "significant psychological effect" on pension fund trustees and their external fund managers, the IFMA response said.
While insurers appear to endorse lifting minimum and maximum investment requirements in different asset classes, the CEA noted "all restrictions on investments cannot systematically be considered as contrary to the principle of prudence: an appropriate and standard framework, fixed at a reasonable level, is necessary to guarantee the security of commitments."
What's more, insurers are particularly keen to link pension liabilities with assets to ensure protection for plan participants.
Mr. Monti, however, appeared to favor a broad prudent-man rule, combined with modern asset/liability management techniques.
Plus, Mr. Monti provided a strong push for investing in equities. As governments stabilize their finances, government bond markets will be unable to absorb huge new investment inflows, he noted.
"Apart from property, for which strict maximum limits are also applied, and corporate bonds, in which a significant market has yet to develop in Europe, the answer has to be chiefly equities. The size and the importance of pension funds are likely to become decisive elements in establishing a real EU-capital market," he said.
dynamic regulation urged
The EFRP submission added that regulatory oversight of pension funds "should become more dynamic, taking into account the long-term liabilities (of pension funds) and implementing modern portfolio risk assessment methods."
And, it said, pension funds should be required to regularly update participants on their investment arrangements.
The EFRP also argued that pension funds should be free to pick "duly licensed" money managers and custodians.
Some countries, notably France, worry about not having regulatory oversight of foreign-based firms.
Pan-European fund backed
Pension experts also favored creating a pan-European pension fund vehicle -- a goal that long has been blocked by individual country tax rules.
EFRP officials said this could be accomplished either through a European vehicle, similar to the notion of a European company, or by establishing the fund in one country with subunits that meet each nation's tax rules.
Geoffrey Furlonger, head of the EU practice for William M. Mercer International S.A., Brussels, said this issue should be tackled under separate legislation.
"In other words, the commission should consider drafting a European pension fund statute," he wrote.