The revised IORP Directive must do more to regulate pension funds’ outsourced activities, as third parties such as custodians or asset managers running the whole of schemes’ assets are not immune from bankruptcy risk, one lawyer has claimed.

Speaking with IPE, Hans van Meerten, lawyer at Clifford Chance in the Netherlands, conceded small pension funds would be unlikely to pose a systemic risk to financial markets were they to collapse.

But he argued that larger pension funds could represent more risk due to the management of their huge assets, which they mostly outsource to commercial parties.

“Pension funds and their representatives currently claim that, in the event of underfunding, they could easily reduce the pension benefits paid to their members and put in place some protection mechanisms to avoid going bankrupt,” Van Meerten said.

“However, if a state were to nationalise the second pillar, I wonder whether that would not pose a systemic risk.”

He also cited the tendency at large pension funds – particularly Dutch ones – to outsource the management of their assets to external asset managers and custodians.

“If one of those entities were to collapse, this would have some significant consequences on the proper functioning of the internal market,” he said.

Van Meerten said the European Commission should therefore step up efforts to better regulate asset managers working on behalf of pension funds.

According to him, Brussels should make sure the revised IORP Directive not only regulates pension funds’ governance and reporting activities but also their commercial activities.

“You can argue that the pension fund itself is not a commercial entity, but it’s a different thing for asset managers,” he added.

“Therefore, if you regulate the commercial activity of the pension fund through the IORP Directive, you recognise that the commercial activity is the responsibility of the pension fund itself.”

In a previous discussion with IPE, Brussels-based lobbying group PensionsEurope argued that pension funds were unlikely to collapse.

It claimed that pension funds were “merely users of markets”, not part of them, and as such posed no systemic risk.