Top 1000: Europe's slimmer regulatory agenda
The Juncker Commission is targeting the Capital Markets Union and a legislative agenda that focuses on engaging long-term capital, write Jonathan Williams and Taha Lokhandwala
EU initiatives in summary
• The EU’s Institutions for Occupational Retirement Provision (IORP) Directive is progressing through its stages of negotiation towards a ‘trialogue’ meeting involving representatives of the European Parliament, the Council and the Commission.
• Parliament is attempting to restrict the ability of the European Insurance and Occupational Pensions Authority (EIOPA) to impose the holistic balance sheet on the pensions industry through IORP II.
• A consultation on the Capital Markets Union is attempting to remove barriers to the flow of capital in EU.
• EIOPA has conducted stress tests on schemes in 17 countries covering two economic-disaster scenarios.
• EIOPA has also consulted on a regime for personal pensions to allow the development of a cross-border third-pillar system.
• The launch of the European Fund for Strategic Investments offers guarantees to investors and transparent online pipeline of projects.
• The passage of the Shareholder Rights Directive through the European Parliament saw the initial proposal weakened.
The collapse of Lehman Brothers in 2008 triggered a wave of regulation as agreed at the G20 in Pittsburgh in 2009. In Europe this included the requirement to clear derivatives trades under the European Market Infrastructure Regulation (EMIR), the Alternative Investment Fund Managers Directive (AIFMD) and rules around shadow banking. But in the wake of Jean-Claude Juncker’s confirmation as president of the European Commission in the summer of 2014, and his choice of Jonathan Hill as Commissioner for financial stability, financial services and Capital Markets Union, the Commission is placing less emphasis on the quantity of regulation.
IORP II Directive
It is in this new political environment that a recasting of the Institutions for Occupational Retirement Provision (IORP) Directive was first debated by member states in the Council and then the European parliament. Published by the Commission in March 2014, the proposal made no mention of capital requirements but left in place controversial requirements for full funding of cross-border entities, a measure widely regarded within the industry as holding back the market’s development.
Other proposals, such as the Pension Benefit Statement (PBS) and the Risk-Evaluation for Pension (REP), was not welcomed by the industry and underwent several revisions while being discussed within the Council.
Attempts were also made to weaken the powers granted to the Commission and the European Insurance and Occupational Pensions Authority (EIOPA), by removing allowances for delegated acts that would be drafted once the IORP Directive had passed through parliament and would not be subject to scrutiny.
The resulting draft directive, finalised in late December ahead of the European Parliament appointing Brian Hayes as lead rapporteur, retained the REP and PBS, but the Council’s negotiating mandate with the parliament only emphasised the importance of good governance and relevant information in statements – a far cry from a wholehearted endorsement of either concept.
Hayes, an Irish MEP and member of the Economic and Monetary Affairs committee (ECON), has made repeated public comments on the need for greater cross-border activity and his desire to see the IORP Directive as a minimum harmonisation tool. His draft report on the legislation, set to be discussed within his committee in late 2015, lives up to this desire and attempts to relax full funding requirements. It also replaces the REP with an internal risk assessment that would be proportionate to the scale of the fund, rather than the detailed requirements to re-assess the risk stemming from several areas, including climate risk, initially suggested by the Commission.
Most importantly for the industry, Hayes’s draft report seeks to stop EIOPA from introducing its holistic balance sheet (HBS) without a third recasting of the IORP Directive. The parliamentarian says the supervisor’s tool lacks a realistic assessment of cost or benefits for the industry and suggests it would stunt the growth of pension funds if applied to the sector. It remains to be seen whether the remaining members of his committee prove as willing to take on both EIOPA and Commission, but trialogue negotiations between the Commission, Council and Parliament are set to launch in early 2016.
Holistic balance sheet
Towards the end of 2014, EIOPA published its proposals on the HBS bringing forward six options including solvency capital requirements, minimum funding levels or a simpler risk-management tool. Rather than a feared one-size-fits-all solution, EIOPA came out with a principles-based solution with inherent flexibility.
Although the previous internal markets Commissioner, Michel Barnier, dropped any reference to capital requirements from the IORP II draft, EIOPA continued its work even as the European Commission changed and Hill was appointed. A consultation on the technical aspects of the HBS ran until early 2015 with some praise for “sensible” models but an outright rejection from others. The German pension fund association, aba, said succinctly of the technical proposals: “If it is sound, it isn’t practical; and if it is workable, its results are questionable.” While many praised the flexibility EIOPA was considering within its HBS, this same flexibility undermined its effectiveness.
EIOPA maintains it received many positive suggestions and comments on the HBS, along with praise from certain sections of the industry. But the main impetus and reasoning behind EIOPA’s continued push remains elusive to some observers. Many fear and view it as an attempt to continue work on capital requirements for pension funds despite Commission rhetoric that this has been halted. EIOPA is now working on proposals to the Commission for early 2016. Of the six models it brought forward in 2014, the final outcome could be entirely different, or a combination. The Commission will then decide whether to take the HSB further forward.
Hill has said EIOPA’s work is valuable and integral but has refused to pre-empt any Commission decision until a final propsoal has been made.
Further into the European legislative machine, the European Parliament made its view on the HBS clear towards the middle of the year. Publishing his report on the IORP Directive, Hayes, the IORP rapporteur, moved to stop its introduction – despite there being no formal link between the two. Hayes said the HBS was not realistic in practical terms and suggested that neither the Commission nor EIOPA had power to draft technical standards. He said the HBS’s cost and benefit analysis was not realistic and no capital requirements or HBS-like framework should be developed at EU-level.
EIOPA’s stress test
In May, EIOPA announced a stress test on European pension funds, both defined benefit and defined contribution schemes. Data was collected from funds in 17 countries across the European Economic Area, with EIOPA aiming to analyse about 10 years of investment and divestment data.
The authority said this would cover periods of financial stability and stress to help define whether IORPs had been pro or anti-cyclical. It emphasised that the test would not be a copy of that used on insurance firms and said it would work hard to develop a suitable framework for pension funds. EIOPA added that there was no current way to analyse direct transmission channels between pension funds and investment markets, making the stress test entirely necessary. The risk of market re-pricing has to be assessed, according to the authority.
The tests looked at two scenarios.
One assessed negative demand shocks or a broad-based reversal in asset prices that leads to further problems for EU sovereign funding and bank lending. The spread between German sovereign yields and other EU countries widens, with consumption falling and unemployment rising.
The second test focused on a negative demand and supply shock, with a more abrupt decline in asset prices coupled with geopolitical risks. This leads to an oil and commodity shock. The declining oil price is assumed to compensate for the drop in demand, with the US less affected than the EU owing to its status as a large oil producer and its more advanced economic recovery.
The tests concluded in August and were led by national regulators with results to passed to the Commission in 2016, coinciding with its work on the HBS.
Capital Markets Union
While the IORP Directive is the area of most interest to the pensions industry, it is only a small area of responsibility for Jonathan Hill and his re-purposed directorate-general, formed after parts of the Barnier department were split in two. As Hill’s title implies, he will also oversee the launch of the Capital Markets Union (CMU) by 2019, for which a Green Paper, Building the Capital Markets Union, was published in Spring 2015.
The CMU project will focus on removing the remaining barriers to capital within the EU. While details to date remain scarce, a review of the Prospectus Directive from 2003 has already been completed and – hand in hand with the law governing disclosure for companies to attract capital – comes a renewed focus on securitsation to allow small and medium-sized enterprises (SMEs) to access funding through means other than banks.
European Fund for Strategic Investments
In addition to attracting greater capital through more harmonised markets, in 2014 Juncker set out details of a €315bn investment initiative that would be led by the European Fund for Strategic Investments (EFSI). In an effort to mobilise capital to invest in viable projects, the European Investment Advisory Hub will be launched later this year, allowing the exchange of best practice, and the European Investment Project Portal will allow interested investors access to a pipeline of projects. The EFSI, officially launched in July 2015, has named its board and identified several projects where it will underwrite the construction risk. The projects were identified by the European Investment Bank, with the guarantee facility aiding Copenhagen Infrastructure Partner’s second fund, backed by a number of Danish pension investors.
The EFSI has largely attracted funding from member states’ development banks, such as France’s Caisse des Dépôts and Germany’s Kreditanstalt für Wiederaufbau, but the UK, lacking a development bank, had as of July 2015 made the single-largest capital contribution of all EU members.
Shareholder Rights Directive
The Shareholder Rights Directive, announced at the same time as the recast IORP Directive, has passed through the European Parliament. Amendments made by MEPs bring a greater emphasis on tax transparency, but also removes one of the law’s key principles – that of a binding vote on pay by shareholders.
While greater tax transparency, including country-by-country disclosures, is a feature many responsible investment groups desire, inclusion of amendments in the current law has been seen as a distraction.
The weakened Shareholder Rights Directive will also now allow member states to decide whether a binding vote on pay should be granted. This means that shareholders would have more or less power, depending on the country in which firms opt to list.
Pan-European personal pensions
Hill has also prioritised the development of cross-border private pension funds. EIOPA’s July consultation paper on the creation of a standardised Pan-European Personal Pension (PEPP) product outlined a PEPP system that was based around scale, operating across national borders and which should ideally offer default fund options – potentially based around lifecycle funds. This would operate in parallel to existing national third-pillar systems, rather than seeking to harmonise all existing funds.
Europe’s funded pension systems: why the figures differ
Estimating the size of Europe’s funded pension sector is a complex task, given the large number of schemes and the many different types of scheme arrangements. Four main sources – the European Insurance and Occupational Pensions Authority (EIOPA), PensionsEurope, the Organisation for Economic Cooperation and Development (OECD) and the European Central Bank (ECB) – report the figure consistently. However, because of differences in their geographical focus and viewpoints, the four figures can vary greatly.
EIOPA, an EU-level regulatory body, estimated a total of €4.6trn for 2013. PensionsEurope, the umbrella body representing European pensions fund associations, provided a 2012 figure of €5.3trn for the occupational pensions sector Europe-wide.
The association tried to estimate the wider occupational pensions sector by collecting data for book reserve and life and pension Insurers, in addition to pension funds.
According to the OECD, a mainly rich country think tank, the total for the European countries it covers was €5.6trn in 2013. The ECB produces quarterly figures for pension fund assets, although these are limited to the euro-zone. The total was €2.2trn for 2014, while the latest figure for pensions assets at March 31, 2015 is €2.4trn.
In terms of geographical coverage, the OECD reports data from 32 countries, EIOPA from 30 and Pensions Europe from 25. The ECB features just 12 of the 18 euro-zone countries, with France, Greece and Ireland among those not included. PensionsEurope’s data is provided by its 21 member associations as well as the four Central and Eastern European Countries (CEEC).
Switzerland’s exclusion in some round-ups has a noticeable impact on the totals. In addition, the ECB does not cover France since pension funds as defined in the European system of accounts do not exist there.
The sources of data used by these surveys vary. The OECD says its data come from regulators and supervisory authorities. EIOPA also draws its figures from the European and European Economic Area (EEA) supervisory authorities. Pensions Europe obtains its data from the member associations and the members of the CEEC Forum. Finally, the ECB says its main national sources are existing supervisory collection systems, complemented with other existing national central banks data sets.
“EIOPA’s aim is to compile a comprehensive database of pensions plans and products in the EEA”
The purpose for which the four bodies are collecting the data determines whether a pension fund is included in the surveys.
EIOPA’s aim is to compile a comprehensive database of pensions plans and products in the EEA. The authority lists every type of privately managed pension plan and product, so long as it has the explicit objective of retirement provision.
The OECD figures come from national pensions authorities and embrace all types of pension plans, including “occupational and personal, mandatory and voluntary, covering both public and private sector workers”.
The ECB says that pensions funds “consist only of those pension funds that are institutional units separate from the units that create them. These funds have autonomy of decision making and keep a complete set of accounts”. It notes that non-autonomous pension funds set up by credit institutions or non-financial corporations are not covered since they are not separate institutional units.
The Pensions Europe survey makes a distinction between mandatory and voluntary privately managed pension arrangements, which are in the second pillar. This mandatory classification includes not only CEE countries such as Bulgaria, Croatia, Estonia, Hungary, Latvia and Romania but parts of the system in Finland, Iceland and Sweden.
The bulk of Pensions Europe figures refer to voluntary schemes linked to paid work and these are defined as “private pensions arrangements for which the ‘product characteristics’ are negotiated by social partners or at a company level within a legally defined framework”. Within the survey, it refers to these under the heading of Pension fund/IORPs (Institutions for Occupational Retirement Provision).
According to the IPE Top 1000 figures, a compilation of the leading 750 continental European Pension funds and 250 of the largest UK funds, the total is €6.16trn.
This array covers a wide-ranging definition of pension funds and includes, for example, pension insurers, which are insurance companies dedicated to pension provision.
In other studies these would be excluded. As the IPE study, based on figures complied by Standard & Poor’s Money Market Directories, just covers 1,000 funds, albeit the largest in Europe, there are thousands of other pension funds not included, therefore the true figure for the total of Europe’s pensions assets is likely to be considerably higher.