The resignations of the EC commissioners could hardly have happened at a worse time for DGXV’s pensions proposals. Commissioner Monti was within a week of taking the wraps off his ideas about removing more of the obstacles to pensions on a pan-EU basis.
His draft communication, the result of intensive discussion with the European pensions industry and the EU parliamentary committees, lives on, however. EC staff tend the shrine until the new high priests come.
One of those working closely on Monti’s pensions project, helping to hammer its ideas into shape, was Martin Merlin of the DGXV pensions and insurance team.
Addressing the recent NAPF investment conference in Bournemouth in a personal capacity, Merlin’s main thrust was on the thorny topic of coordinating member states’ investment and prudential rules. “Why do we need European regulations here?” he asked. His answer was categoric: “To ensure application of the freedom of investment effective in the UK and the Netherlands.” Some countries’ restrictions prevent them benefiting from the wider capital markets.
The intention was to enable pension funds to appoint any asset managers and custodians approved to operate in the EU. “We must make sure that pension funds can appoint any of these.”
The demands of employers operating cross border had also to be tackled by moving towards cross-border membership of funds.
“Currently there are no directives for those providing occupational pension benefits,” he pointed out. But he added that the regime appropriate to other sectors, particularly the question of extending the Third Life Directive, would not be appropriate to the pensions area. “Pensions funds and life insurance companies are different,” Merlin stressed. But there would be similar rules, where the products offered were the same.
Focusing on the key issue of the prudent-man approach favoured by the EC, as against the quantitative rules on pensions investing and asset allocation, prevalent in a number of countries, he sounded a warning that it could be difficult to apply the prudential approach in all member states. He posed the question as to whether “there is a need for options in the directive?”
Clearly this was something that the EC would prefer to avoid, he said. It might mean giving member states the choice of having the full prudent-man principle or some quantitative limits on assets, provided these would not be excessively binding and in conformity with the treaty. “There could either be no currency matching re-quirements or a certain level of currency matching for those states who wished for this for funds established in their own territory only.”
While the EC would leave the level of funding to the individual countries, some form of minimum funding re-quirement would be envisaged to se-cure beneficiaries’ rights. This did not mean the EC wanted to introduce a solvency requirement as for life insurance companies, since pension funds do not offer financial guarantees normally. But some level of funding would be required, as was the case in most member states. It might be possible to have a combination of minimum funding to a certain level and insurance guarantees. The EC would look at and discuss other options, he said.
Commenting later, Kees van Rees, chairman of the European Federation of Retirement Provision (EFRP), said the association believed that the EC was on the right track with these proposals. “The EC has to reconcile its conviction that generally freedom of investments is good and benefits pension funds, with, on the other hand, the awareness that some countries need convincing about this. They need additional measures to be able to say ‘Look, we took care of the issue of the security of assets’.”
He added: “There is going to be a local element, but the aim must be to minimise that aspect.” In the Netherlands and the UK, there was the view that – subject to a loose prudential framework – freedom of investment was good, but for other countries it would be difficult to implement such rules within their legal environment.
Van Rees believed there was now no question of imposing restrictions on liberal regimes. “I think we are past that stage absolutely.” What was very important, in his view, was that no rules would be introduced that would have an effect on those countries with a well developed pensions business and a liberal regulatory regime.
He also believes that on the insurance issue the outcome looks satisfactory from a pension fund viewpoint. “The solution is now that you will have the same rules for the same product. It is obvious that most pension and insurance products are different. Pension funds do not issue guarantees, so in this sense there is no need whatsoever to adapt rules that are similar to the ones in the third life directive,” he points out. “Within pension funds, we have to give our best efforts to ensure that the money is there to pay pensioners.”
One area he thinks needs special attention is custody. “I am very much in favour of the position in some countries, including the Netherlands, where there is a clear split between asset management and custody. The two should never be jointly held. I think it is in the interest of the security of pension fund members to have such a regime.”
The EFRP would work with the EC on any minimum funding requirement being established. “In order to do this you have to detail the actuarial value of your liabilities. There are major differences in the way that these are defined.” This was an area where the EFRP could do some work to try to get to a harmonised approach.
As to the likely reaction from within the EFRP membership across Eur-ope, van Rees felt hopeful that there was a good chance a directive on the lines Monti was working towards had a good chance of getting through.
A more cautionary note was sound-ed by Anne Maher, chief executive of the Irish Pensions Board, speaking in London last month at the Royal Institute of International Affairs conference, of which the EFRP was one of the sponsors. “Optimistic Brussels sources are confident that the EU progress on supplementary pensions is merely delayed and not buried. However, many people believe the resignation of Commissioner Monti could not have come at a worse time for the European pensions world. He had shown strong commitment to the pensions issue.”
She went on to point to DGXV’s wide remit and said that this could spell disappointment for those ex-pecting pensions to top the next commissioner’s list. “Even if the new commissioner is interested in pensions, he could have a different pensions agenda, particularly if he comes from a different political background.”
Maher believed there had been a “fair amount” of support for the moves on greater investment freedom, the prudent-man approach, and the use of qualitative rather than quantitative controls, but that “this has not been universal”. “There have also been suggestions that the EC has recently weakened in its firm determination to press ahead with a high level of investment freedom.”
Many people agreed the EC ap-peared to be striking a reasonable balance in its recent comments on pension regulation and that “the issues it has appeared to be focusing on were those which should be centralised, such a prudential supervision of pension funds, freedom of investment and fund management, the co-ordination of tax arrangements and improved labour mobility regulations.” She added: “Others, like me, felt the EC needed to go further on centralised regulation for areas other than investment. Consumers need protection in many other areas, for example, sales, information, benefit payments, portability and indexation of benefits.”

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