That the Spanish delegation to the European council working group on the pensions directive is trying to introduce quantitative rules has caused a bit of an uproar in Brussels. Those proposing the changes are silent while those opposing them are defending the parliament’s espousal of the prudent man principle. Ironically though, it is looking progressively more likely to turn out a poke in the eye for the likes of the UK and Netherlands.
Last month it emerged that the Spanish delegation had drawn up a confidential proposal containing sweeping restrictions on the use of derivatives and investment in real estate and private equity. Because of the paper’s confidentiality, those opposing it are briefing off the record.
Although it is the Spanish delegation’s baby, it refuses to disclose the precise proposals, only to say that it is working “in the spirit of co-operation”. Jose Carlos Garcia de Quevedo, the man leading the Spanish delegation, was unavailable for comment but his assistant Joaquin Melgarejo said that the working groups had discussed investment rules at the last meeting on 22 February.
“We support the prudent man approach but we consider that it is necessary to include the minimum rules but in a common ground for everybody,” says Melgarejo without really defining the minimum rules. One of the problems, according to the Spanish delegation, is defining what constitutes an investment restriction.
Less so for members of another delegation who is not so keen on quantitative restriction. They also confirm recommendations that investment be limited to OECD countries and to listed companies and that pension funds ought to be prevented from maintaining open positions in derivatives.
With regards the OECD restrictions, Melgarejo says they are not really suggesting investment solely in OECD countries. “We propose that pension funds invested in well-organised markets and the majority of organised markets are in OECD countries. But not all.”
The European Federation for Retirement Provision (EFRP) preferred not to comment on the matter only to confirm that it believed the restrictions had indeed been suggested.
Perhaps this is hard on the Spanish delegation, after all, quantitative restrictions appeal to many member states and are nothing new. But just when the directive looked like gaining momentum (ironically courtesy of the Spanish) so the introduction would set the progress back in that the parliament last year endorsed the prudent man principle and to end quantitative restrictions within the next five years.
At the moment around half a dozen member states are in favour of including some kind of quantitative rules and leading those in favour are Spain, Belgium, French and Italy.
Anne Maher, chief executive of the Irish Pensions Board, confirms that Ireland supports the Commission’s proposals. “Ireland has always supported qualitative investing,” she says. The UK, Netherlands and Scandinavian countries all echo the same sentiments.
According to an employee in a large European pension scheme who is up to date with the working group, those in favour of quantitative rules almost constitute a qualified majority. At present there is no ‘blocking minority’ able to stop the changes, or proposed changes to the directive.
For those member states vehemently anti, there are two sources of hope. First, and most significant, is an interview given by Frits Bolkestein to the Financial Times newspaper in which he threatened to withdraw the proposal if the Council amends it and introduces excessive restrictions.
The other glimmer of hope is if the German delegation to the working group has a change of heart. German funds are subject to a couple of quantitative restrictions that the delegation wants to retain. “But,” says the pension fund employee, “if the Germans can be assured that, in spite of the prudent man rule, they can have their quantitative restrictions, they can probably join the prudent man group which would give you a blocking minority and things would become a lot easier.”
As for Bolkestein’s threat, it is politically rather hard to carry out. The directive has already been withdrawn once. “If the commission withdraws it twice then it looks as if they are out of touch with what the member states want and at that point it becomes more and more difficult to introduce a new directive,” says the pension fund employee.
As for the other hope, even if the Germans do change their mind, there is a chance that the sake of European unity will block the blocking minority. “The item will just be left open and then having dealt with all the other issues, they will put all the remaining ones together and trade one against the other. At that stage, you can still, even with a blocking minority, be overruled in the name of European unity,” they say.
Such is the way collective decision making operates, the size of pension fund industry, and therefore the vested interest, has little bearing. In other words, that the UK, Netherlands and Ireland, whose occupational industries dwarf the equivalent of those countries in favour of the restrictions, is almost an irrelevance.
Or, as another pension fund employee puts it more cynically: “If in Brussels you discuss subsidies on rice, there’s only one country that produces rice but every country wants to have their say and the same is going on here. It is exactly those that do not have second pillar pensions that are most adamant when it comes to quantitative restrictions.”
Another suggestion on the table is a compromise, one that gives member states autonomy over the restrictions they choose to impose. Those in favour of restrictions have apparently opposed this as second best in that funds can simply flee to those countries with the least restrictions.
As to whether the quantitative rules prevail, there is a relatively tight timetable. Since the directive is included in the Financial Services Action Plan, so it is bound by that. Three meetings for the working group are scheduled for April and the May ECOFIN meeting will discuss the issue.
MEP Piaa Noora Kauppi says the parliament has indicated that it would somehow like to be involved in the outcome. “We cannot go to the working group meetings but there should be co-operation between the council and parliament,” she says.
But even if some quantitative restrictions are introduced, how serious are they? Many observers now accept it is likely that investment restrictions will feature but that they are unlikely to be that severe. And even those opposed to excessive restrictions agree that some in fact make sense. Enron’s recent demise and the subsequent state of employees’ pension have highlighted the plain sense of avoiding over investing in one share.
Kauppi maintains that the kind of rules being introduced are unlikely to be excessive. “It is probably realistic that there will be some rules, some basic rules on diversification, for example, similar to those in the UCITS directive. But we cannot put these kinds of rules into the same category as the quantitative rules that are the present rules in member states. If it is only basic rules on diversification then I don’t think this is a major problem for any member state,” she says.
As IPE went to press, the Barcelona meeting was underway and since the presidency has specified the pensions issue will be covered, the likelihood of including quantitative rules may become more apparent. If not, the delegations have the three working group meetings this month. Spain’s team says it is unsure how easy it will be to get those opposing them on board. If it continues with its original proposals, it won’t be in the dark for long.

Topics