Keeping a requirement for underperformance notifications in the next version of the EU’s pension fund legislation could undermine prudent long-term investing, EFAMA has said, echoing other industry body concerns.
Requiring IORPs to notify members and supervisors of significant underperformance against supervisory benchmarks is part of the European Commission’s proposal for changes to the IORP II Directive.
It has already been criticised by the Dutch pension fund federation and today the Brussels-based European asset management body also called for its removal, or at least modifications.
“We are concerned that requiring IORPs to notify members and supervisors of significant underperformance could produce counterproductive investment behaviour,” said EFAMA.
“In systems where members cannot switch providers, such notifications do not enable corrective action and may create confusion or undue concern.”
It said keeping the requirement could result in increased index-hugging, or reduced allocations to assets whose performance materialises over longer horizons, “undermining prudent long-term investing and the prudent person principle”.
If retained, the provision should be substantially refined, allowing IORPs to determine their own benchmark, in line with their investment strategy, and the assessment horizon extended, according to EFAMA.
“The Commission has delivered, but it now needs member state support”
Kimon Argyropoulos, EFAMA regulatory policy adviser
Other recommendations made by the lobby group for the IORP II review include the adoption of a principles-based approach to cost transparency, and a proportionate application of depositary requirements.
PEPP ‘restrictive’ on private markets
EFAMA also weighed in on the review of the Pan-European Personal Pension (PEPP) Regulation, another key element of the Commission’s supplementary pensions package.
It welcomed the proposal to remove the 1% fee cap for the Basic PEPP, but said the proposed value for money framework was “questionable”.
It denounced the current 5% limit for investment in private assets as too restrictive and said the framework should allow investors – either individually or collectively – to select risk profiles.
A useful example, it said, was the PER in France, in which savers choose an overall risk profile – prudent, balanced, dynamic, or offensive – that determines how contributions are allocated across various asset classes.
In practice, EFAMA said, this means prudent profiles typically allocate 2-6% to private or unlisted assets, while offensive profiles can allocate up to 15%.
It also said member states should be allowed – at their discretion and in compliance with national social and labour laws – to include PEPPs in workplace arrangements with auto-enrolment and employer contributions to expand coverage.
However, PEPPs should complement, not replace, existing occupational pension schemes, particularly in member states where such systems are already well established.
Member states buy-in key
Overall, EFAMA said the Commission’s supplementary pensions package – which also includes auto-enrolment recommendations – was “a decisive step toward closing Europe’s growing pensions gap” but “turning this opportunity into real benefits for Europeans will depend heavily on effective implementation at the national level”.
“The Commission has delivered, but it now needs member state support,” said Kimon Argyropoulos, EFAMA regulatory policy adviser. ”A flexible PEPP and a principles-based IORP framework are critical to making this a reality.”
