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Capital Markets Union: A single market for capital

Pledging to “knock down barriers” and let capital flow freely across the European Union, Jonathan Hill, commissioner for financial stability, announced in September how he would achieve the European Commission’s pledge for a Capital Markets Union (CMU).

The initiative – meant to increase inward investment by 2019, boost funding to SMEs and increase personal savings – has been used by institutional investors to highlight the challenges they face when investing in Europe. To that end, the insurance industry won support for a standalone infrastructure asset class under Solvency II, addressing concerns that capital requirements would stifle investment. 

The pensions industry won fewer visible concessions, although the Commission pledged to investigate the tax barriers holding back cross-border investment and challenge any discriminatory tax policies. The Action Plan on Building the CMU also backed work on a pan-European personal pension (PEPP) product but did not commit to the introduction of legislation. 

The pensions industry nevertheless embraced the initiative, with PensionsEurope chair Joanne Segars saying funds welcomed a “comprehensive approach” to financing cross-border projects. She nevertheless did not offer her unqualified support, saying that the proposal had the “potential” to create a market where capital and opportunities were better aligned. 

The hesitation might stem from the belief that Hill’s Action Plan did not fully address pension investors. In its consultation response, the Dutch pension manager APG insisted that scale was the key to attracting institutions to any market. “Only if a market segment is large enough,” it said, “will institutional investors consider building a team and an infrastructure to cover it.”

The Action Plan addresses the issue of scale for SME financing by pledging support for venture capital funds, amending the European Venture Capital Fund regulation and its counterpart for European Social Entrepreneurship Funds. It also suggested funding could flow towards cross-border venture capital funds, with the promised package also promoting tax incentives, likely as part of Commission president Jean-Claude Juncker’s Investment Plan. 

However, in other sectors where large-scale investment is possible, rival pension manager PGGM shied from using the European Long-Term Investment Fund (ELTIF), meant to channel assets towards long-term project funding. PGGM argued that sizeable investors would be able to invest directly at a lower cost. It did, however, see the benefits of the ELTIF as a means of reducing political risk. “ELTIFs might help regain trust if these governments become co-investment partners and have ‘skin in the game’, which reduces their incentives to change regulation.”

Support for PEPPs vary depending on the industry, with the European Fund and Asset Management Association welcoming an idea long-championed by its members. “The current market fragmentation makes economies of scale impossible to achieve and limits the choice of pension products and pension providers,” the association argues, noting that the PEPP would boost the flow of retail savings. 

The Polish Chamber of Pension Funds also welcomed the idea but called for a focus on ensuring the established pension funds have the ability to be true cross-border investors. “For example, a large pension fund in Poland has limited ability to provide long-term financing to an infrastructure project in Greece or vice-versa. In fact, only 1.4% of all private pension assets in Poland are invested cross-border.” It insists greater cross-border activity will not only help attract funding to more projects but also diversify investment risk.

Some of the matters, such as the relaxation of investment guidelines, should be tackled by a revised IORP Directive, and whether the Commission can deliver on its pledges to remove tax barriers and scale up venture capital investments. 

However, based on the determination to mobilise private capital – and the seven-month period between consultation and launch – it seems possible that investors will be listened to in the corridors of Brussels. 

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