Left out in the cold
It’s that word again – compromise. The compromise reached between the European Parliament and the Commission in March that ushered in the Pension Funds Directive was generally welcomed as ‘painless’ way to create a pan-European market for occupational pensions.
After all, the process had been going on so long that the Commission made it clear that it wanted the directive signed, sealed and delivered while the opportunity remained. The alternative was ‘conciliation’ – which nobody wanted.
So, yes it was a compromise, but one that most people could live with in the wider interest of getting the directive off the ground.
But in any compromise, there are winners and losers. The losers in March, it seems, were fund managers. Brussels-based FEFSI, the Fédération Européenne des Fonds et Sociétés d’Investissement, is the pan-European umbrella organisation of the investment funds industry – and is in the process of merging with the European Asset Management Association. And it feels it has been left out.
“We had in mind a pension fund directive that opened up a level playing field,” says Steffen Matthias, FEFSI’s secretary general. “In a certain sense we lost this battle as the idea of a level playing did not find much support either at the Commission or the member states.”
“Personally, I think we missed completely the support of the European Commission, which speaks about a level playing field,” Matthias adds. “But there was a sort of protectionism for life insurers. There was no real political will to fight for the level playing field.”
Of course, FEFSI’s counterparts in the insurance industry have a different take on events. “We’re very happy with this directive,” says William Vidonja, deputy manager for life insurance at Brussels-based European insurance body the Comité Européen des Assurances.
“We supported all the different stages of the process at the institutions – it was one of the main items we had to deal with in the CEA because we wanted insurers’ – and especially life insurers’ – point of view to be taken into account in the directive,” Vidonja says.
He adds: “It was quite easy to make the European authorities understand that we were an occupational pensions provider, and that we had to be included in the directive.” He says the CEA fought for insurers to be included in the directive. As for other providers being left out, “that was not our problem”.
FEFSI feels it was excluded as a result of the political expediency involved in the process. “We lobbied strongly,” says FEFSI’s Matthias. “I think the European Parliament fully accepted this level playing field idea at the first reading until a compromise needed to be found at second reading.”
Matthias’ colleague, Bernard Delbeque, senior economic adviser at FEFSI, looks back to the compromise position of Parliamentary Rapporteur Othmar Karas in March this year. “Just before going to the plenary we had an amendment of the Karas report, the common position that acknowledged the problem of the level playing field and proposed to open the level playing field to all providers of second pillar schemes.
“And at the end, in the week that preceded the discussion at the plenary, there was a compromise proposed by the European Commission and at the end supported by the European Parliament that came up with a set of amendments that could be accepted by all parties.
“But in those set of amendments, the amendments that constituted the level playing field were withdrawn and we got a position statement that the Commission would look after these issues of the level playing field and the possible extension of the scope of the directive.”
Matthias thinks one of the barriers FEFSI faces is that the idea of life insurance is entrenched. “It is a mentality and we have to fight this not only on the European level, at the Commission level, but also at the national level. The retirement second pillar is far more than life insurance. This insurance idea was too much embedded in the mind of people.”
Matthias says the inclusion of the funds industry would lead to more competition and lower prices. “As everybody knows, a fund product is more transparent, it is cheaper, so it has many advantages which life insurance does not have.”
“If you look at the second pillar market, this is a market that should be open to any providers of pension schemes that are accepted at national level,” Delbeque asserts. “Our view is why do you only want to have two players and not other players? Why don’t you want to be forward looking?” He says that with an ageing population, alternative providers would create innovation, introduce competition and lower costs.
The CEA’s Vidonja does not agree that by just including life insurers in the directive – at the expense of other potential providers - that the directive failed to open up the market. Indeed, he disputes the directive’s objective was to open the market up. Not for him talk of a “level playing field”.
“I think the aim of the directive was not to open up the market but to establish a first step towards a single market for pensions providers and for supplementary pensions. It’s not necessarily the same,” Vidonja says. “The directive established a prudential framework – in order to ensure a high level of security and efficiency of operations in the occupational pension field.”
The CEA’s Vidonja adds: “So if legislators consider that providers of occupational pensions are not able to ensure security or unable to comply with the directive – it’s not my problem.”
He sees a way for the fund industry to get into the market via legislation at the member state level. “It could be that in this case national legislation would allow other providers to get in the second pillar. The drawback for those providers is that they would not get the passport because to get the get the passport you need to be strictly in line with the directive.”
FEFSI’s Delbeque counters that the manufacturers of investment products have the ability to create something that would meet the requirements set by the national legislators. But he says the problem is that the directive as it stands requires firms to create a separate company – a very expensive option.
From the CEA’s point of view, the directive will increase competition between life insurers in Europe. “So with higher competition and a greater variety of products this will be to the benefit of consumers,” says Vidonja. He sees economies of scale trickling down to consumers.
So it remains to be seen whether the funds industry can make any impact on the pensions area in the years ahead. Whether it will be providing occupational pensions in five years is an open question. The directive contains a clause allowing the Commission to review the directive after it has been operational – perhaps opening a door for fund managers. As Steffen Matthias says, FEFSI will keep on lobbying.