A European Commission proposal to benchmark returns could discourage pension funds from investing in alternative and illiquid assets, thereby achieving the opposite of the intended objective, the Dutch pension fund association has said about the proposed revision of the EU’s pension fund legislation.
In its November proposal for changes to the IORP II Directive, the European Commission introduced a provision foreseeing that national supervisors set benchmarks for monitoring performance. Article 41 also defines the reporting required from pension funds in the event of underperformance.
According to Pensioenfederatie, the term ‘benchmarks’ is not defined and the proposal could be understood as benchmarking against some kind of market index or against the performance of peers.
“Both are fundamentally different, but equally problematic as they lead to an incentive not to deviate from averages,” the association said in a position paper.
“The proposal disincentivises allocations to asset classes with more volatility, i.e. alternatives. Moreover, the short timeframe (three years) also penalises investments with a long investment horizon, such as venture capital investments and infrastructure.”
Pensioenfederatie’s conclusion is that the proposal “therefore undermines the purported objective of the review to increase allocations to these asset classes and the aim of the Savings and Investment Union [SIU]”.
It is urging policymakers to remove the article on underperformance or at least amend it so that IORPs define their own benchmarks, rather than supervisors. In addition, the three-year period would need to be extended to at least five years and the term ‘benchmark’ should be defined.
General duty of care and other themes
Other IORP II review proposals also do not align well with the Dutch system, the association said. It is concerned that communication with members would deteriorate if, as is proposed, a standardised European pension benefit statement were introduced.
“It will simply not be possible to accommodate all the vastly different national systems with a single standard,” Pensioenfederatie staff wrote.
“Moreover, it is preferable to decide at national level which specific cost indicators are included on the pension benefit statement, rather than in IORPII.”
According to the Dutch federation, although there are some positive aspects to the IORP II review proposal, like a reinforced prudent person principle, other parts “risk shifting the regulation of occupational pensions towards a retail consumer-protection model that does not fit collectively organised, not-for-profit schemes governed by social partners”.
In addition to the benchmarking and pension benefit statement proposals, Pensioenfederatie highlighted as problematic the proposals for a general duty of care, the mandatory appointment of a depositary, and a mandatory regular supervisory dialogue on the viability of an IORP.
At a meeting of EU member states last week, the Dutch finance minister warned that revisions to the bloc’s pension rules must not come at the expense of thriving national models like that of the Netherlands.
Recommendations, PEPP review
The IORP II review proposal is part of a package of measures the Commission put forward in November, and in its position paper, the Dutch pension fund association also addressed these.
The review of the PEPP regulation, it said, could improve access to funded pension products in countries where occupational pensions are lacking, provided the changes do not undermine well-functioning occupational systems.
It is “paramount” that the proposal to allow the PEPP as a vehicle for auto-enrolment remains subject to a member state option, Pensioenfederatie said.
The Commission’s supplementary pensions package also included recommendations aimed at member states, for example for auto-enrolment and pension tracking systems.
The Dutch federation welcomed the recommendations, saying the Commission should encourage their implementation “with all means available, while respecting national competences and social partners, and monitor national developments closely”.
