Debating the directive
Tower of Babel it may not be, but you can’t mistake the feeling that the language of the architects involved in the genesis of the directive on supplementary pensions is being lost somewhat – not only in the translation, but in what they are actually attempting to build.
The European pensions and investment industry was given its say on the European Commission’s draft directive, at the open hearing of the European Monetary Affairs Committee (EMAC) in Brussels on February 6.
And as expected, the hearing, chaired by German MEP Christa Randzio-Plath (PSE – European Socialist Party) was not short of controversy.
One of the more resonant arguments came from Phillip Lambert, global head of pensions and pension fund investments at Anglo-Dutch multinational Unilever, who suggested the Commission’s draft had been hijacked by insurance companies and that no directive at all might be preferable to the one currently on the table.
Lambert claimed that the “major obstacle” lay with the insurance background or liaison of many participants in the legislative process. Thus, he said, the issue of a level playing field between the Commission’s Institute for Occupational Retirement Provision (IORP) and insurance companies had been: “blown out of all proportion by the well-organised insurance lobby”.
Insurers, he said, were stoking up arguments about solvency requirements for IORPs, leaning on the indication in the Commission’s draft directive that all IORPs should have “sufficient and appropriate” assets to cover the technical provisions of the plan.
However, Lambert reminded the hearing that occupational pension funds were non-profit making organisations and for the most part underwritten by the sponsor, contrasting this to the profit motive of insurers.
His arguments were backed up by Wiebe Okkema, of the Dutch PVK regulator, who was quick to point out that the asset buffer system required in the Netherlands covered such eventualities and that by the end of 1999 had reached 150%.
To Lambert’s mind the focus of the debate on supplementary pensions had shifted away from potential of a directive to allow the prudent pursuit of higher investment returns as a result of lower restrictions and free choice of investment managers and custodians.
Somewhat dejectedly, he announced: “I have serious doubts that this is the way it is going to pan out and I hope, but am not convinced, that at the end of the day we do not find ourselves in the unfortunate situation where we have to say: better no directive than a bad one.
“The effect of the approach taken in the draft directive would be that the 99% of pension funds which will never operate cross-border would be subject to a lot of regulation and red tape.
“It would discourage smaller employers from taking the most cost effective ‘funding route’, ie, through pension funds and drive them towards insurance companies.”
Unsurprising then maybe that Roger Bowley of the Comité Européen des Assurances welcomed the inclusion of life insurers in the directive’s scope – noting the upholding of the level playing field principle for providers.
He went further though, arguing that insurers should be able to target IORP business on the basis of strict rules for separate activities and not compulsorily via the establishment of a separate legal entity.
And he warned of problems at national level where insurers could be subject to either the European insurance or IORP directives, calling for choice over which way the provider approached this.
Kees van Rees, chairman of the European Federation for Retirement Provision (EFRP), pushed forward again the argument for qualitative investment rules, arguing that the quantitative opt-out would dampen employee retirement payouts and undo the thrust of the proposals: “Restrictions and guarantees cost money. One per cent extra return per annum gives 20% more pension to the average pensioner.”
Van Rees also called on the parliament to support the pension fund principle: “This proposal does not support or create new pension funds.” He added: “It raises too many hurdles to market access.”
Consequently, the EFRP suggested that both the requirement for regulatory own funds and the full funding principle should be scrapped.
At the more liberal end of the spectrum, Marc Bayot, chairman of FEFSI’s pensions and investment funds committee, said the parliament should extend the IORP remit to include individual savings plans, arguing: “In reality there are more and more schemes that are based on a different approach and give their participants a certain degree of freedom to manage their retirement savings.
“To reach the directive’s goal it must be ensured that those types of schemes are included.”
He noted that this would include such vehicles as Germany’s AS funds that specifically provide for the payment of capital and or annuity at retirement.
Reminding delegates, however, that they were talking about pensions and future livelihoods, Henri Lourdelle, adviser to the European Trade Union Confederation (ETUC), urged investment caution.
Lourdelle backed up the need to establish a minimum set of investment rules for IORPs, which he said would avoid “Purely speculative investment, which risks creating disillusion for the retired.
“Nobody can guarantee these rates of return over the long term,” he argued.
The debate was no less vigorous amongst the parliamentarians present – if not occasionally obtuse and bludgeoning in some cases.
For his part Othmar Karas, Austrian MEP, member of the European Peoples Party (EPP – Christian Democrat) and rapporteur for the European Parliament on the directive, tried mediation on the question of the inclusion of biometric risk: “Biometric risk is not just a question of longevity. Would you accept that it might have to be offered, but that people could then choose whether they wanted to do this?”
Wilfried Kuckelkorn, German MEP (PSE), countered: “If we don’t want to cover biometric risk then you could already do much of what we are talking about here through the life insurance directive.”
In turn, Astrid Lulling, MEP for Luxembourg (EPP), vigorously reminded those present of what she called the objective of the directive “to open up the free market for provision, not to make up for the lack of the first pillar.”
Lulling also questioned the longevity aspect of women and equality of pension rights within the directive’s framework, which she thought were under addressed.
Chris Huhne, UK MEP and member of the Liberal and Democratic Reform Party, was apoplectic, however, over the proposed introduction of quantitative investment levels for IORPs, commenting: “Does this have an economic basis or is it a political fudge based on the voodoo economics of neanderthal members of the council of ministers?”
Bartho Pronk, Dutch MEP (EPP) and member of the Committee on Employment and Social Affairs, wondered whether everyone involved in the directive’s genesis had the same goals in mind:
“There has been a tendency to convert the second pillar to the first or third pillar here.
“Does the insurance industry know what the difference is between the second and third pillar?”
Striking a final conciliatory note, however, Karas summed up: “There are different historical reasons for the way in which member states have set up their own systems and these must be borne in mind when making a concession.”
He remained upbeat, however, at the progress being made: “Given the different agreements on the pension contracts between member states and the limits of freedom of choice, I am pleased that scepticism has given way to the need for a directive.”
Noting that the tax question, currently under consideration by EC Commissioner Frits Bolkestein, would be integral to the success of the directive, he nevertheless called for the parliament to throw its weight behind the thrust of the draft directive and take a March 22 motion for resolution on the legislation, to be followed by a plenary vote in the parliament in May: “I would urge the council to contribute to the general principle, because the beginning made has not been met with general glee.
“The Commission’s position has to be clearly put if we want to make this part of the second pillar, rather than just transposing the interests of national providers.”
It just may be that for the success of the directive there may be no better time to re-examine the plans and clarify just exactly what the European remit is on the supplementary pensions issue.