'Compromise of a compromise'
After years of debate and some false starts, in the end the European directive on occupational pensions came down to a “compromise of a compromise” worked out between a few key players meeting just before the crucial vote at the European Parliament.
At stake was, in the words of European internal markets commissioner Frits Bolkestein, a directive of “particular strategic importance” for capital and labour markets and the sustainability of Europe’s public finances and pension systems.
The key sticking points were biometric risks and the adoption of the so-called “prudent person principle”. Biometric risks refer to disability and death benefits while the prudent person principle restricts the discretion in a client portfolio.
Biometric risk provision was seen as being part of the social aspect of the directive - which the socialist contingent in the Parliament wanted to be included. In the end biometric provisions were included, albeit in a watered down form. Indeed, one MEP called the directive’s inclusion of a biometric provisions a “fig leaf” to enable the socialists to save face. But other MEPs were not so sure. “Biometric risks certainly could present problems,” said one.
John Purvis, vice chairman of the European Parliament’s Economic and Monetary Affairs Committee recognises the contribution of Othmar Karas, the Austrian MEP who is the Parliamentary rapporteur on the directive. Karas was “really quite clever” Purvis said.
The final version that was voted through by Parliament on March 11 was a compromise that was, in the end, acceptable to many. “It was more or less what we wanted right from the start,” said Purvis, who as well as being an MEP is non-executive chairman of London-based investment management firm Belgrave Capital Management.
Karas, Purvis said, “wanted as big a compromise as possible” to ensure that the directive passed through Parliament. “In fact, he achieved that.”
Purvis, of the European People’s Party and one of three vice chairmen of the EMAC, said the compromise position was worked out between the Commission and MEPs at a meeting a few days before the plenary vote. Present at the meeting were Bolkestein, EMAC chair Christa Randzio-Plath, Karas, UK MEP Theresa Villiers as well as Purvis.
“At that meeting Karas came up with a compromise on Bolkestein’s compromise,” Purvis said. “It meant that biometric risks were an option for member states - not a regulation.”
“We said we could agree to it,” Purvis said. Biometric provision was the main issue, he said. Bolkestein assured him during the debate that the wording on biometric risks would not create a loophole. Indeed, Bolkestein was explicit during the debate that biometric risk provisions “should not be an obstacle to cross-border activity”.
“We didn’t want pension funds to have to provide for biometric risks as they are savings vehicles,” Purvis said.
“We’ve ended up with a pensions investment regime that is pretty liberal on a prudent person basis that was by no means normal five years ago,” Purvis said. “The challenge is that managers are up to the task.” The move means, he added, that the European second pillar pensions system is now in a “fit state for the future”.
The directive’s quantitative requirements were not seen as a major problem. Purvis said they were “an acceptable compromise”, and that the levels would be acceptable to a UK pension fund. He said the quantitative rules that managed to stay in the directive were indeed “fairly prudent in themselves”. They were watered down by discussion, he said. “I’d say it was a victory for a modern, liberal, corporate pension environment.”
Finnish MEP Piia-Noora Kauppi welcomed the directive, saying it will help to provide equity to European companies and liquidity to markets. She cited the example of Finnish phone firm Nokia, whose employees would now be able to pool their assets - “they will be big investors,” she said. Indeed, the ending of the fragmentation of corporate pension funds “will be the best result of the directive”.
In an interview Kauppi said the process of getting the directive approved by the Parliament was “quite efficient”, though she said it was a pity that the Council took so long to prepare a common position. “I think the original common position was acceptable.”
On the issue of biometric risk provision, Kauppi said: “I think that market forces will try for a more defined contribution type of product with less coverage. It will depend on the national policy mix.”
She welcomed the inclusion of a transition period to the prudent person principle from the quantitative system. “If you use the quantitative system it’s very difficult to change the approach of the regulators, so it maybe takes five to 10 years for the regulators to get used to the new approach.”
She said that Karas did a good job in getting a compromise agreed. “In order to get the socialists on board with the compromise he gave them something and what he gave them was not harmful.”
“We already knew that if we accepted the compromise as such then we would not go into conciliation.”
The directive enables providers to market their products, even before national legislation is made by member states, she said. Directives had “direct force”. “You can start the process already now.”
UK MEP Mary Honeyball spoke of the difficulties in getting the directive passed. “My colleagues and I found this quite a hard one,” she said. She acknowledged that the directive is a move in the right direction - especially with the retention of the lump sum provision. “I think it’s a lot better than it was,” she added. “We were happy with the common position.” It was important that the directive not interventionist, she said. Honeyball noted that the directive still has to go to the Council.
Christopher Huhne of the European Liberal, Democrat and Reform Party, said the inclusion of biometric risks in the directive was a “face-saver” and a “fig leaf”. He pointed out that it is an option, not a requirement. “I don’t think it says very much to be frank.”
He welcomed the directive as a boost for markets. “Overall the effect will be market opening,” Huhne said in an interview. The directive was a key building block for the FSAP in determining how the buy side operates. He too paid tribute to the rapporteur. “Karas steered us to a very effective compromise.”
“It will cut the administrative costs of many multinational companies’ pension funds, allowing people to have better pensions when they retire,” Huhne said during the debate. “It will help millions of European old people to retire in the sun.”
Bolkestein, in the final debate, had made clear the objectives of the directive. “It does not intend to interfere in the way member States organise their pension systems,” he said. “It considers that the directive should not regulate in a restrictive way the products offered by pension funds. Nor should it define the precise arrangements for the payment of benefits.”
Time will tell if the directive as it stands will be able to uphold such objectives.