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The question of just how prepared the member states are for implementation of the EU pension directive, which comes into force next October, is concentrating the minds of the pension industry across the continent.
Peter Kraneveld, recently appointed by Dutch healthcare fund PGGM as special adviser for international affairs, with a brief to monitor EU legislation, is among the keenest observers in the Netherlands. “The pensions directive is a way-station, not the terminal,” he says. “The first drafts of what is now the directive contained language that would have severely impaired the interests of our participants for little or no benefit and I became part of the effort to convince the EU institutions to change that language. Fortunately, we had a compelling argument and they were good listeners and the end result was a modern directive that opens up real possibilities for market integration.”
He rejects suggestions that the Dutch pensions sector, having considered the directive to be toothless, has come to the conclusion with less than a year to go that it has bite. “We never considered it to be anodyne,” he insists. “What we have said, though, is that it is a basis from which to start and that other things should have been arranged before it started operating. We think it is important that all member states have the same tax system. Some progress has been made in this area, but major problems remain. We see a danger that the directive is being overtaken by the market, which has created very interesting instruments, such as the Société d’Epargne de Pensions à Capital Variable (SEPCAV) and the Fonds Commun de Placement (FCP) in Luxembourg and the Common Contractual Fund (CCF) in Ireland.”
Kraneveld is a man of several hats. As well as his role at PGGM, he is the representative of the Dutch association of industry-wide pension funds, the VB, on the European Association of Paritarian Institutions (AEIP). This puts him in a pivotal position to view how the directive is being implemented and to flag up potential problems in advance.
A key basic requirement ahead of the directive’s coming into force, he stresses, is the establishment of just what social and labour law should encompass. “The directive’s definition of what is labour and social law is too vague and the danger is that a very wide definition would allow the whole directive to be hollowed out,” he notes. “For example, if you say that every law that applies to pension funds is social and labour law it would mean that you could go to any country you wanted and still be subject to the rules of the home country, which is exactly the opposite of what the directive intends. It says that international pension funds should be subject to the rule of the host country.”
Another key development, says Kraneveld, is that, “following World Bank advice, a number of new EU member states have decided to set up what the World Bank calls a ‘notional direct contribution (DC) part of the system’, where notional means there is no money backing up the pension obligation and no reserves are separated from the state budget for these programmes”.
Industry observers stress that this has laid the basis for confusion and threatens to prevent the emergence of the level pensions playing field that is the directive’s aim. The directive is intended to regulate second pillar funds not pay-as-you-go systems while first pillar funds are covered by EU regulation 1408/71. A notional DC is basically a pay-as-you-go system that is administered as a fully funded system with an enormous deficit. Consequently, a case could be made claiming that as a notional DC scheme is not fully funded, it does not fall under the directive while not being first pillar it does not come under 1408/71 either. As a result notional DC schemes could avoid the obligations imposed by both the regulation and the directive, enabling them to operate more cheaply and without an adequate cover ratio.
The directive’s setting of a minimum cover ratio has also given rise to an element of confusion. “Article 16 of the directive sets the minimum cover ratio at 100% at all times while Article 17 has a complicated formulation that refers to the insurance directive in case the fund covers biometric risk or gives a performance guarantee,” says Kraneveld. The Dutch authorities confuse these earmarked buffers with general reserves and go on to claim that the directive actually demands a higher cover ratio than 100%.
“If, as the Dutch government believes, this criterion has been mandated by Brussels all should meet it, and according to its calculation method the end result would be a cover ratio of 105% in all member states. However, other member states will read it differently and will maintain that the cover ratio remains 100% and that should pension funds undertake certain risks they should take some reserves for them. So it’s all a question of what others are going to do. If everybody explains it the same way, there is not a problem. But if the Dutch government is going to be more severe than others – and it does have the right to put the minimum cover ratio at 105% – it cannot say that this has been mandated by Brussels and neither can it expect other member states to stick to 105%. It is therefore the Dutch authorities that create an unequal playing field, not the directive.”
The Dutch government’s decision to introduce the directive into Dutch legislation by adding its clauses as amendments to the existing pensions law rather than waiting to incorporate them in a new pensions law it is in the process of formulating has won industry plaudits. But the social affairs ministry’s accompanying memo of explanation to parliament has been criticised for adding elements that are not in the directive and without consultation with the industry.
PGGM, like others, has responded to the European Commission questionnaire that asked stakeholders to detail problems they were expecting with implementation. So Kraneveld will be busy until next October. “The sector needs regulations and we must try to make the best of it and try to make it technically sound at least,” he says. “There is nothing life threatening or revolutionary in the directive and its implementation, but where we have identified problems we are going to notify people at all levels what they are, why they are problems and how they should be rectified.
“We are certainly not going to play politics. However, we have had a lot of initiatives from the Dutch government lately and some of them have created unnecessary problems and we were quite unhappy with them. But that’s life, sometimes you win and sometimes you lose.”
Will the Dutch pension sector win or lose in the key problem areas that have already been identified? “It is obviously wrong if some pension funds do not come under any directive or regulation, but whether notional DC funds come under 1408/71 or the pensions directive is not a question of winning or losing as long as they come in somewhere,” Kraneveld says. “And whether the cover ratio is 100 or 105 in all member states is really not a big issue. But it is of concern if the government insists on putting us in an unfair competitive position compared with the rest of the EU.”

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