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Impact Investing

IPE special report May 2018

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Is there light at the end of the tunnel?

Perhaps there really is light at the end of the tunnel. For months now, a large and rather vocal contingent of the European pensions industry has been debating the additional costs they might incur if they are subject to solvency capital requirements similar to Solvency II’s pillar one – the one focusing on capital requirements. But now several pensions experts have told IPE that the European Commission may be thinking to “water down” the first pillar and focus instead on the second and third pillars.

Their optimism most likely stems from three significant developments in the pensions industry. First was the announcement of a Green Paper on long-term investing by the Commission back in June. Then came a report by the UK pensions minister, Steve Webb, who pointed out the “alarming” increase in costs Solvency II-type capital obligations would have on the UK industry. Finally, at the European Insurance and Occupational Pensions Authority (EIOPA) conference in Frankfurt, a member of the Commission stated that capital requirements would apply to future rights only.

Philip Neyt, managing director of Belgacom’s pension fund, says members of the Commission have acknowledged to him that transposing some of the Solvency II measures agreed back in 2008-09, in the middle of a financial crisis, into the current economic environment could have a “major” impact on Europe. “The message I received from regulators at the EIOPA conference in Frankfurt made me think they are currently working on serious proposals to water down the first pillar of the IORP Directive,” he says.

And Neyt is not the only one who has seen evidence of a volte-face by the Commission with respect to the first pillar. Charles Vaquier, chief executive at French pension fund UMR, has also seen signs of change. “Considering the comments made by Karel van Hulle at the EIOPA conference,” he says, “everything makes us believe Brussels will be unable to introduce the first pillar of the directive.”

Clearly, the comments made in Frankfurt by Van Hulle, the European Commission’s head of unit for market and services, have not gone unnoticed. In November, he affirmed that Brussels would not impose Solvency II-capital requirements on pension funds’ past rights, but only for accruing rights. For many, the decision – which came after protracted negotiations with the industry – was a breath of fresh air. Until then, many pension representatives argued that introducing such obligations for both past and future pension benefits would have major cost repercussions for European schemes, especially defined benefit funds. The announcement made by Van Hulle therefore means that pension funds’ existing books will not be covered by solvency capital charges.

However, Van Hulle told IPE that the fact that Brussels will look differently at the existing book is not new. “This is a comment that has been made many times,” he says.

In addition to that announcement was a report commissioned by Steve Webb to the UK Department for Work & Pensions. The study concluded that Solvency II measures in the revised IORP Directive would cost the local pensions industry as much as £400bn (€498bn). According to pension representatives across Europe, having UK authorities backing up their lobbying efforts is encouraging news since this could exert strong influence on the reshaping of the IORP Directive.

Additionally, the upcoming launch of the Green Paper on long-term investing by the Commission comes, for many in the industry, as an important step towards the amendment of the Solvency II and IORP II regulatory frameworks. Many pension experts see this paper as a tacit recognition that those two current frameworks would prevent institutional investors from financing long-term projects.

However, this talk of dropping the controversial first pillar altogether might be nothing more than wishful thinking. As Chris Verhaegen, chair of EIOPA’s Occupational Pensions Stakeholder Group, says, if the Commission decided to water down the first pillar of the directive, it would have had no choice but to act before the end of 2012. “Since Brussels wants to publish a draft of the directive in June 2013. The Commission would need to translate political decisions into texts beforehand,” she says.

Van Hulle also says that it is premature to think that Brussels will drop the first pillar. “The Commission will only take its decision after having seen the results from the QIS exercise, which is still running.”

Some of the rhetoric coming out of Brussels in the past six months would suggest at least some recognition of the industry’s concerns. But, officially, there is no clear indication the Commission is actually planning to drop its original plans. And while there may or may not be a light at the end of the tunnel on the first pillar, Vaquier has warned his peers that they cannot give up their lobbying efforts just yet, as the second and third pillars are likely to entail “huge” costs of their own.

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