Sections

Still scratching heads

Currently, there is some concern that member states will not meet the September deadline for implementing the IORP directives. However Ivo van Es, the European Commission official in charge of the implementation of the directive, has said that the EC expects all 26 member states to fulfil their obligations.
So it is timely to consider what impact the IORP directive is likely to have on the occupational pensions in Europe.
Its proponents suggest that the effects are likely to be benign. Karel van Hulle, of the European Commission’s internal markets directorate, said recently that the
implementation of the pensions directive would force member states to rethink their existing retirement systems and make them more efficient.
Currently, many EU states place limitations on investments pension funds. This inevitably limits the returns. The IORP directive’s use of the ‘prudent person principle’ will introduce a less restrictive investment regime.
There are signs that not all EU member states are finding it easy to implement the provisions of the IORP directive. The European Parliamentary Pension Forum recently observed that the transposition of the directive has provoked ‘intense debate’ among member states, and that a number of states are having difficulties transposing its provision into national law.
There are plenty of incentives for them to drag their feet. There is still no solid EU-wide definition of occupational retirement provision, and it has been left to member states to decide which of its occupational pension vehicles fits the definition of an IORP.
So what impact is the IORP directive likely to have on the way Europe runs its occupational pension schemes? Will it, as its proponents suggest, liberalise Europe’s pension assets or will member states find ways of retaining the status quo?
We wanted your views this month. The response was more muted than usual. Clearly there is considerable uncertainty about what, if any, impact pensions directive will have on their own schemes. In some cases this is because there is uncertainty at a national level.
Some IPE readers, of course, were unable to respond. The IORP directive will play no part in Switzerland, a non-EU member, as Swiss pension fund managers were quick to point out.
However, attitudes towards the effect of the directive are mildly hopeful although enthusiasm for the directive itself is lukewarm. There is general approval for the arrival of the prudent person principle. A clear majority - three fifths - of the pension fund managers and administrators who responded to our survey agree that the implementation of the IORP directive is likely to make Europe’s occupational pension schemes more efficient, in the sense of removing quantitative limitations on investments.
Yet a minority - two fifths - believe the IORP directive will encourage countries to create pension systems that put a premium on long-term profitability. And less than a third feel that the implementation of the directive will lead to a liberalisation of pension assets.
The directive will not include all occupational pension schemes and exempts companies with unfunded schemes. So neither Germany’s book reserve schemes nor its contractual trust arrangements will have to make any changes to the way they operate.
It is not surprising, therefore, that a large majority of our respondents - three quarters - think the directive will have limited impact in countries where there is little funded private sector retirement.
One of the objections to the directive is that it adds another layer of bureaucracy to the regulation and administration of European pension funds. This is clearly the view of our respondents, with three fifths agreeing that the directive is likely to add to the compliance burden of pension funds generally.
The IORP directive is also likely to increase the demand from pension fund boards and trustees for professional advice from consultants and investment advisers. The directive calls for investment in accordance with the prudent person principle to ensure that assets are properly diversified.
A small majority of our respondents agree that adopting the prudent person principle will mean that pension funds will have to rely more heavily on their advisers.
Bringing matters closer to home we wanted to know whether the IORP directive significantly affects the way individual respondents’ pension schemes are run. Here there is some uncertainty. Some managers say they do not know and are waiting to see the detail of their own country’s transposition. In the UK, in particular, the government has left the detail of transposition until the eleventh hour.
Slightly more than half the respondents believe it will affect the way their pension fund is run. Some managers suggest that it will increase risk-taking. One Swedish pension fund manager observes: “We will take more risk and leave liability-matching behind us.”
This is unlikely to mean a change in asset allocation, at least for most pension schemes. Only a third of the managers who responded to our survey think that the directive will lead to any change in their own scheme’s asset allocation.
We also wanted to know whether the managers of pension schemes were experiencing any difficulties in adopting the provisions of the IORP directive in their own pension scheme. Here there is little evidence of trouble. Less than a third of our respondents admit to any difficulties.
There are some important concerns, however. The manager of one UK pension fund says that the scheme is worried about the law of unintended consequences – the tendency of well-intentioned government measures to go awry: “We have told the Department of Work and Pensions that we are very concerned about the effect of the law of unintended consequences in the current draft of transposing investment regulations.”
The directive still leaves considerable discretion to member states. Member states can still decide to apply quantitative rules within limits. The coverage of biometric risk is left to member states to regulate by national law. Labour and social laws are left to member states’ jurisdiction. And crucially, the issue of tax regulation is left firmly with member states.
So we asked what you thought was the single most significant obstacle to the success of the IORP directive: slow progress on tax harmonisation, national social and labour laws, or national quantitative investment limits. A clear majority - three fifths of our respondents - see the slow progress towards tax harmonisation as the single biggest obstacle. One in four see labour and social laws as an obstacle, and only one in five think that the imposition of national quantitative limits could prove troublesome.

Some managers feel, passionately, that governments and politicians are the biggest impediment to any pension reform. One Swedish pension fund manager says the biggest single obstacle to the IORP directive’s success is “politicians meddling in things they do not understand”.
Others do not actually want the directive to succeed. The manager of one UK pension fund is disarmingly frank about this. “We are not currently convinced that we wish the directive to succeed,” he says.
The ‘no’ votes to the European Union constitution in referenda in France and the Netherlands have cast a pall over pan-European projects, and the prospects for a single market. Will this slow progress towards a pan-European pension?
Opinion is fairly evenly divided. However, a slight majority agree that the no votes have made it less likely that pan-European pensions will become a reality within the next 10 years.
Finally, looking ahead to when pan-European pensions are a reality, we asked what the effects are likely to be. It has been suggested that as multinational companies establish cross-border occupational pension schemes, they will begin to compete with national occupational pension funds in the provision of pension services across Europe.
Three in five of our respondents agree that this kind of competition is likely.
Yet there are some doubts. The manager of a Nordic pension fund observes: “The pensions market is in essence local. What is perceived as a good benefit varies between countries and it will take more than 30 years before Europe is harmonised, the differences being larger than we like to think.
“What can be harmonised and co-ordinated is funding and investment, probably not plans and levels of pensions. The drift towards DC has little to do with the EU.”
Perhaps we should expect less of pan-European pensions directive than its proponents promise. Time will tell.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2503

    Asset class: Equities.
    Asset region: Emerging Markets.
    Size: EUR 30m.
    Closing date: 2019-01-31.

  • QN-2505

    Asset class: Real Estate Core/Core-Plus Multi-sector strategy.
    Asset region: Asia-Pacific.
    Size: $ 50m.
    Closing date: 2019-01-28.

  • QN-2506

    Asset class: Currency Overlay.
    Asset region: Global.
    Size: USD 4 bn..
    Closing date: 2019-02-11.

Begin Your Search Here