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Focus on pension funds’ social purpose

One of the most important victories during the recent bargaining process over the revised IORP Directive is related to the fundamental nature of pension institutions.

Despite IORP II building on the harmonisation introduced by its 2003 predecessor, discussions and horse-trading at the Council of the EU has focused on whether pension schemes are simply financial service providers or, rather, financial institutions with a social purpose.

While the distinction may seem unimportant, the underlying issue is whether schemes should be treated and regulated the same way as other financial service providers, such as insurers, or through the prism of institutions bound to member state social and labour law. 

The wording of any revision is important in such cases, to avoid giving the impression pension providers and funds are in any way expected to be vehicles investing for the benefit of society – rather than focusing on paying pensions in retirement.

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At a conference hosted by the European Insurance and Occupational Pensions Authority (EIOPA), Jan Parner of Denmark’s Finanstilsynet argued strongly in favour of viewing pension providers as financial institutions.

Parner, the regulator’s deputy director general in charge of pensions, stressed that pensioners would be unable to live off social investments that helped others, but did not provide a cash flow for retirement. “And that’s why I simply cannot understand that you have a social institution.”

He said the idea of investing for a social purpose was something with which he “completely disagreed”, despite many in the population accepting the notion of intergenerational transfers as part of the pension system.

“It might be the perception [that] you have of solidarity, a concept that you will be okay with smoothing between certain cohorts, but to say they are not a financial company [when] all the revenue they get in that pension fund is generated through the financial system, I simply don’t get it.”

Nevertheless, under the compromise Directive draft – drawn up under the Italian presidency – schemes are once again “pension institutions with a social purpose that provide financial services”.

Overall, the industry appears to have won almost as many battles as it has lost with the draft Directive. Although it has been unsuccessful in getting the Pension Benefit Statement removed entirely – as at least the idea now is part of the Council’s negotiating mandate with the European Parliament – much of the other detail has been removed, leaving stakeholders with a slimmed-down draft that can be more easily imposed on member states. 

For its part, the controversial risk-evaluation for pensions (REP), regarded by some as the European Commission’s attempt to introduce pensions-specific own-risk solvency assessments (ORSA), has now been taken out of the hands of European bodies.

The Commission will no longer be able to impose its views on the industry through a delegated act, while mention of EIOPA’s ability to draft technical standards has also been removed, leaving power over the REP with member states.

After Jonathan Hill was named financial services commissioner, many hoped he would protect the pensions industry – especially UK defined benefit funds – against new regulation. But it seems the industry has been able to lobby for a compromise text removing most of the contentious issues, leaving it with an IORP II draft that is firmly a tool for minimum harmonisation, as would be expected from a Directive over a Regulation. 

These amendments may not stick, and it depends entirely on how hostile or open MEPs are to the proposal, and how skilfully a yet-unnamed rapporteur steers it through the Parliament.

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