Gail Moss reports on the progress pension fund associations are making as they seek to influence future legislation
Pension funds have a crucial role to play in shaping both domestic and EU pension and investment legislation. And in spite of under-representation generally, their lobbying associations have scored some notable triumphs.
In particular, both national and pan-European groups fought against the inclusion of pension funds in the original draft Solvency II directive. “We had a long struggle, and at one point we feared that Solvency II was going to be applied to pension funds,” says Francesco Briganti, director of the Brussels office of the European Association of Paritarian Institutions (AEIP). “But we managed to stop this, and are now co-operating with the European Commission, EIOPA and other pension fund organisations to draft a new solvency framework, more adapted to the features of pension funds, via the current revision of the IORP directive.”
But associations are not always successful in getting their point of view accepted.
Private pension funds in Ireland have been saddled with a 0.6% levy on assets, to fund the government’s jobs initiative. “We did a lot of PR work to warn about the potential impact,” says Jerry Moriarty, director of policy, Irish Association of Pension Funds. “But we weren’t listened to. In the end, the levy was presented to us as a fait accompli.”
He says that with six-monthly reviews on the national economic position being carried out by the IMF and EU, the emphasis is on short-term issues. “Already the National Pension Reserve Fund, which was set up for long-term needs, has been stripped of its assets, in order to refloat the banks,” he says.
Nevertheless, the IAPF is thinking positive. “It’s no good just saying no to these things,” says Moriarty. “Ireland has agreed to finding savings and we have to be creative, coming up with alternatives.”
Another government measure that IAPF is still lobbying against is the restriction of higher rate tax relief on employee pension contributions; by 2014, everyone will be getting standard rate relief.
A further issue is funding standards; after being put on hold for years, proposals requiring more support from sponsors were published in the summer. “That could be a tipping point for employers,” says Moriarty. “There’s no point in having a scheme if they’re always being asked to put money in.”
The IAPF has also been active in terms of broader financial market regulation. In particular, the recently-passed [US] Foreign Account Tax Compliance Act makes it more difficult for European pension schemes to hold US equities. The IAPF has written to the US Treasury to object, and is also looking to address this through the EFRP.
Solvency in Finland
In Finland, the main priority is solvency. In 2008, the government brought in temporary changes to the solvency requirement for pension funds, allowing them to increase their risk-taking capabilities. This stopped the forced selling-off of stocks, particularly domestic equity investments, which are more volatile than European and global stocks.
Pension fund solvency levels have recovered almost to their pre-2008 levels, but the legislation expires at end-2012. “We think we should have permanent rules to cover any future crisis, including defining what is a crisis, and what powers the supervisors should have,” says Matti Leppälä, director responsible for international investment and legal affairs, The Finnish Pension Alliance (TELA)
The government has published a four-year programme including further revision of the solvency framework. “A big issue is the influence of the EU,” says Leppala. “Although EU laws must be incorporated into Finnish legislation for insurance companies, this does not apply to pension insurers. But there is pressure to adopt certain features, which would affect governance and supervisory issues.”
Leppala says the second and third pillars of Solvency II will be adopted by pension insurers, but they do not want to adopt the first pillar: “Our pension funds want to keep their domestic, risk-based solvency framework and adjust if necessary.”
At a wider level, TELA members are concerned about planned changes to European financial market rules and regulations. “For example, the OTC derivatives regulation will increase costs, as the Finnish pension funds are major investors,” says Leppala. “But we are not so much at risk as, say, the Dutch pension funds - we don’t use derivatives as much, because the liability side of the Finnish system is not marked to market.”
Reform and DC
In Spain, the state pension system has been reformed; the retirement age will rise from 65 to 67 over 15 years, while the number of years’ contributions used to calculate pension entitlement will rise from 15 to 25. “Because of these changes, the substitution rate would fall from 80% of salary (up to €34,000 a year) to 60 or 70% of salary,” says Angel Martinez-Aldama, director general, INVERCO, the Investment and Pension Funds Association.
The reforms also require the state scheme to disclose the estimated pension entitlement to individuals well before they retire, so they can gauge if they have enough to cover their cost of living. At present, this is only available when they retire. This obligation has been extended to private schemes.
The private pensions system remains unaffected by legislation and taxation reforms, but Martinez-Aldama says pension funds would like an approach that allows part of an employee’s contributions to be paid into an individual account, on a long-term basis, as was approved in Sweden 11 years ago.
The National Association of Pension Funds (NAPF) aims to influence the UK government on key issues. Its report ‘Fit for the Future: the NAPF’s Proper Vision for Pensions’, published before last year’s general election, proposed an improved state pension (the ‘Foundation Pension’) and super trusts. The coalition government has picked up these ideas - for instance, the new Green Paper develops the idea of a single-tier state pension, and the Pensions Regulator is talking about the potential benefits of large-scale multi-employer DC schemes.
Other NAPF policies include the Pension Quality Mark, which encourages best practice for DC schemes. It is also lobbying on broader issues such as corporate governance of investee companies.
At EU level, the NAPF works as an individual pensions organisation, in concert with those from other member states, and through pan-European bodies such as the EFRP. For all of these, the key issues are the European Commission’s review of the IORP Directive, and the work of EIOPA. “Specifically, the key issue is funding,” says NAPF senior policy adviser James Walsh. “If new legislation went the wrong way, it could increase funding requirements for pension schemes.”
Thinking about Brussels
The Federation of Dutch Pension Funds runs a dedicated office in Brussels to lobby the EU. The federation recently responded to the last consultative document from EIOPA - the Call for Advice of the European Commission.
“The review of the IORP Directive is relevant to us because in the Netherlands we are discussing the overhaul of the pension system,” says Sibylle Reichert, the federation’s representative in Brussels. “The social partners have agreed a new pension deal, and we have to see what the EU decides. If it is very different, we will have problems with our own national pension deal, since we will have to implement the revised IORP Directive into national law.”
For instance, she points out that in terms of solvency, the Call for Advice proposes a security level of 99.5%. “In the Netherlands, it’s now 97.5%, so there will definitely be an impact,” she says.
The EFRP is lobbying on the IORP Directive, as well as preparing its submission in response to the EIOPA consultation, presumably open until 25 November. One of the most important aspects is the security of benefits, which is influenced by
Solvency II, says Chris Verhaegen, secretary-general, EFRP.
“Solvency II requires a harmonised approach, but there is a wide diversity of IORPs in existence,” she says. “It is unnatural wanting to harmonise institutions and pension promises that are so diverse, especially within 10 years.” But she adds: “We still believe the IORP Directive review is a good thing, and that we can improve on the first version. But it has to be done in a reasoned way, taking lessons from the 2007-11 period in the financial markets.”
As for the European Market Infrastructure Regulation on derivatives, the EFRP has presented a united front alongside some national organisations.
After strenuous lobbying before the summer, a new clause was included in the European Parliament’s adopted text on OTC derivatives to allow exemption for pension funds from central clearing for three years, and possibly another two years, subject to a Commission report. “The objection to the derivatives regulation is cost and complexity, so the proposal has been changed to give pension schemes exemption, at least temporarily,” says Walsh.
“The exemption of pension funds from central clearing for an extended period is an example of how communications between the EFRP and the Federation of Dutch Pension Funds has achieved a lot,” says Reichert. “You have to have a united approach to be successful.”
But pension associations are not only forming alliances with European groups. The AEIP and EFRP have also pioneered links with their US counterparts the US National Coordinating Committee for Multiemployer Plans (NCCMP) and the American Benefits Council (ABC), to object to certain proposed changes to IAS 19, chiefly the valuation of long-term pension liabilities and disclosure requirements with which it would be harmful to comply.