The long haul
Speaking a little over 200 days into his tenure as EFRP secretary general, Matti Leppälä was a busy man. His secretariat was working on its response to the quantitative impact study of EIOPA (the European Insurance and Occupational Pensions Authority) on the holistic balance sheet proposal, and he was looking forward to the Brussels close season when the city’s politicians, officials and interest groups head for Europe’s holiday spots.
Representing trillions in retirement savings across Europe, occupational pensions have much more modest collective staff and financial resources as an interest group than, for example, the insurance or asset management industries. But this is unsurprising, given that pension funds for the most part act without commercial imperative.
Washington’s K Street this is not. And the pension funds that the EFRP represents through the national member organisations are also a diverse group of institutions, ranging from Dutch, Irish and UK DB schemes to German CTAs and Italian DC schemes.
One of the aims of the EFRP in the 1990s and early 2000s was to achieve recognition of pension funds as distinct entities deserving of distinct legislative treatment at European level. The IORP Directive of 2003 provided a legislative framework and the fact that CEIOPS (the Committee of European Insurance and Occupational Pensions Supervisors, now EIOPA) was so-named was seen as a key achievement.
But wider recognition and understanding of pension funds at European policy level has been skin deep. In the market infrastructure legislation (now co-ordinated at G20 level) they are treated as systemically relevant financial market institutions, notwithstanding the temporary exemption that has been secured from posting margin capital in Europe’s EMIR framework.
When it comes to the IORP Directive, where the Commission has - rightly or wrongly - detected the need for a working cross-border market for occupational pensions, at best the sector is treated as a peculiar offshoot of the insurance industry with a suspicion that EIOPA and the European Commission are taking a ‘same-risk, same-capital’ approach to pensions, despite all protests to the contrary.
Given that there are no K-Street-style European occupational pensions lobbyists, perhaps it is also unsurprising that pension funds have been swept along with the tide of financial services legislation. Nevertheless, Leppälä is confident about the collective strength and intellectual firepower of the EFRP, through its close connection to the national associations that form its membership, and his organisation’s ability to get the sector’s voice across.
Leppälä, who took over the reins as EFRP secretary general in January following Chris Verhaegen’s distinguished tenure of almost 13 years and after a short transition period, was previously more closely involved with the AEIP, Europe’s association for paritarian organisations in his position as a director of TELA, the Finnish Pensions Alliance.
For the first time this year, the EFRP joined forces with the AEIP and five other organisations - Business Europe, the CEEP public employers association, the EFAMA fund management association, the ETUC trade union organisation, the European Venture Capital Association and the UEAPME SME association - to call on the European Commission to reconsider its plans for occupational pensions.
“We will meet on a regular basis, I would hope, and are looking at these issues from a broader perspective,” comments Leppälä. “I think it was the first time we had the European Venture Capital Association, for instance, together with the European trade unions expressing the same view.”
Leppälä is careful not to blame EIOPA for its work on the latest QIS exercise, since it was working to a timetable and within a framework not of its choosing. This is despite the clear limitations that have been expressed in the EFRP’s QIS response, and even more strongly by some of the member associations. Yet Leppälä emphasises the elements that were clearly copied and pasted from Solvency II.
“The parameters are stemming from Solvency II and there is very little reasoning for this, very little to do with anything that has happened in real life. There’s a zero risk premium for euro bonds. Is that really the case if you are looking at real risks?” Leppälä says, stressing that there should at least be parity with Solvency II on the capital treatment of government bonds.
Since only large pension funds will be able to complete the QIS exercise, Leppälä questions how representative the results will be. “It’s too precise and in other ways too vague,” he concludes. “We think it should have been better prepared over a longer time, but for EIOPA it has been a difficult task and they would have had to come up with a totally different framework when, in fact, it’s based on Basel and Solvency II and the whole underlying notion is that you should have a similar regulatory and supervisory framework as other systemically relevant financial market institutions.”
On a fundamental level, Leppälä sees important differences in thinking between the pension sector and the internal market DG on the nature of pension promises and collective bargaining. He thinks the Commission is potentially on a collision course if it tries to impose its interpretation of regulatory certainty (or at least 99.5% certainty using a value-at-risk framework) on promises that arise from collective bargaining.
“Our members think the pension promise can change. Not in all countries in the same way, but in many countries they are the result of collective bargaining or agreement between social partners and can be adapted. We don’t think there’s anything wrong with that but with this kind of a framework it seems like the Commission is saying it would be for them to protect that agreement.”
But Leppälä thinks intrusion on the social contract is clearly beyond the extent of the Commission’s powers. “If the social partners consider workplace pensions to be part of salary, it should be for them to agree if they wish to have a more flexible promise,” Leppälä continues. “If the Commission aims to step into the social partners’ competence, if they are saying pensions are part of salary and it is up to them to do something about it, then they are clearly outside their competence.”
And the crux of the argument, even if one accepts that it is within the Commission’s competence to prescribe the level of solvency capital for Europe’s DB pensions to facilitate a single market in cross-border pension provision, is that a high level of benefit security is ultimately self defeating.
“If you want high security it will cost you a lot. If you want to limit risk-taking capabilities, you of course have to bear low risk and you are certain to have very low pensions because no-one else is going to pay for them.
“The right way to pay benefits is not to pull resources from the real economy and there is a false sense of security in doing this. Excessive capital buffers are not the solution so there needs to be a good balance.”
Leppälä sees further trouble ahead since too-strict solvency rules could undermine occupational pensions per se, which would, in turn, undo decades of work the EFRP has done alongside the wider pensions sector in promoting funded pensions.
There is a clear sense, with the delay to the final implementation of Solvency II for insurers and the end of the current Commission’s mandate in less than two years, that IORP II is too complex and too controversial to enact within that time. There has been speculation that the issue could be deferred to an IORP III Directive.
Yet Leppälä does not see this as a free pass that will exempt the EFRP or the occupational pensions sector from some knotty issues. On the contrary, since the tide of financial regulation has turned and is now co-ordinated at the international level, there is every chance that future months and years will set distinct and tricky challenges.