“We are approaching the prudent man approach as a common ground but with more concrete qualitative (sic) criteria,” is how Jose Carlos Garcia de Quevedo of Spain’s delegation to the pensions working group describes the Spanish attitude towards the pensions directive.
Those following developments in the directive can be forgiven for confusion over the state of play. The Spanish presidency wants to see the directive passed by the end of June but is cagey about laying out its plan of action and saying what exactly it wants.
Hopes were up when, in the middle of last month as it distributed a text covering articles 1 to 22 to delegations to the pensions working group. This batch includes the controversial issues of investment restrictions and funding levels and by the time this edition is out, those involved will have discussed them.
Quite what the presidency is proposing, though, is difficult to gauge. Following leaks to the press about potential quantitative investment restrictions and mandatory funding levels, details on the development of the directive have become scarce.
This is, in part, due to numerous publications reporting that the Spanish presidency was attempting to introduce quantitative investment restrictions into the directive earlier this year. The Spanish claim these reports are biased and pander to UK and Dutch objections to quantitative rules. But, says Garcia de Quevedo: “the directive should be compatible not only with the UK and the Netherlands but also with other member states”.
Initially ‘plus’ was reported as being possible restrictions on investments in unlisted assets, in real estate, in open positions in derivatives and in non OECD countries: “wrong” say the Spanish.
Are there any new proposed restrictions then? Says Garcia de Quevedo: “It depends what you understand by prudent man and prudent man plus. I believe that prudent man is in the directive and plus is at the member state level. It’s very clear. The Spanish presidency is working with a very flexible approach to try to converge all member state delegations.”
Spain is perfectly reasonable in claiming that prudent man is compatible with some restrictions applicable and regulated at the national level. This is a view held by many of the member states and, after all, one of the reasons ‘plus’ was added to prudent man was due to responses to the questionnaires sent out by the previous incumbents, the Belgians.
But on the specific issues, as mentioned above, the situation is less transparent. “It is clear that the presidency is allowing pension funds to invest in derivatives. Are we allowing funds to invest in unlisted stock? Of course, but with a prudent approach. But what is a prudent approach? That depends on the specific member state.”
This cautious approach may eventually turn out to be unnecessary. A delegation member who has seen the latest paper from the presidency describes it as “essentially qualitative-based, except for a couple of limited quantitative restrictions”. The two restrictions in the document refer to investing in regulated markets and to the amount invested in a single issuer.
It threw up no real surprises, they say, it was what was expected. Many of the EU countries are keen to retain some quantitative restrictions and members of the European Parliament, which last year passed the prudent man principle, agree there are likely to be modest and limited restrictions.
The issue of funding rules (solvency levels) is another area that remains unclear. Last month it was reported that Spain was proposing a solvency test for European pension funds. Pensions professionals in the UK were alarmed by the prospect of having to inject cash immediately into deficits highlighted by the new accounting standard FRS17.
The UK is supposedly the only member state opposing the proposition. Unlike many other member states it is not used to reporting 100% funding levels. Acting unilaterally, the UK is unlikely to get the proposal blocked and potentially it could become UK law within two years. Again, reluctance to discuss the issue is perplexing given that the same delegation member says the latest paper’s take on funding is fairly flexible domestically but a little stricter cross border.
As to whether the directive passes by the end of the Spanish tenure, the April meeting will be key. Already Theresa Villiers, a UK conservative member of the European Parliament and spokeswoman for economic affairs, has questioned whether the directive would be completed at the end of the Danish presidency, which is next, let alone before the end of Spain’s six months.
And however prudent man and prudent man plus is interpreted, there remain some unhappy with the present format. One delegate member’s analysis is more positive. “All directives are complicated and technical but it’s still perfectly possible that the various teams will be able to thresh it out.”

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