SPEECH/05/539 Charlie McCREEVY European Commissioner for Internal Market and Services Pension funds and asset management: A European Perspective IAPF (Irish Association of Pension Funds) Annual Benefits Conference Dublin, 22 September 2005
Ladies and gentlemen, It is a great pleasure for me to talk to you today about pensions. In fact I should say in particular today, as today is the last day of the two year period in which Member States are supposed to implement the Pension Fund Directive and communicate the implementing measures to the Commission. Here, I would like to stress are supposed, because we already know that unfortunately some Member States will not have achieved this. But I will come back to this issue later on. Although retirement may be far away for some of us, many problems are already piling up. One often only realises the importance of a good pension, when it is too late to provide for it. European citizens, must be confident that the politicians of today are taking the appropriate measures to ensure that they can enjoy a pension tomorrow. Therefore, pensions are one of the main challenges for the European Union and as Internal Market Commissioner, I have a particular responsibility in that field. Some measures have already been taken in the Financial Services Action Plan in the last five years, such as the Directive on Institutions for Occupational Retirement Provision, also known as the Pension Fund Directive. The recently adopted Green Paper on the enhancement of the EU framework for investment funds, also known as the UCITS review, also aims at contributing to the long-term sustainability of Member States pension systems. But, before addressing the Pension fund Directive and the UCITS Review, I would like to quickly go through some of the outstanding pension issues and put our policy into context. Description of the outstanding pension issues We all know that there is a pension time bomb ready to explode some time after 2010. The baby boom generation is about to retire. People generally live longer. In some countries providing the retirement benefit people expect will represent a huge financial burden. All this leads to less people having to pay more for more pensioners. The situation and outlook may differ from one Member State to another, but the pension time bomb is ticking for all of us. Across the European Union 25 different choices have been made as to the existence, level and funding of state schemes, occupational schemes and individual arrangements. Some may have to be reviewed in the light of the problems lying ahead of us. But I believe there is not one EU-wide solution to these problems. Appropriate solutions must be adapted to Member States different pension systems. However, it is clear to me that funded pensions, be it occupational or private, will play a crucial role in order to cope with demographic changes, maintain the standard of living of retired people and manage public deficits within the terms of the Growth and Stability Pact. But I take the view that the main responsibilities lie with citizens, who have to take their future in their own hands and make the necessary provisions now. However, our governments have a facilitating role to play by providing the appropriate incentives. Role of the Commission State-funded, work-related and individual pension provisioning all have their role to play in meeting Europe s pension needs. Those responsible for managing pensions should be able to choose the best performing investment vehicles, subject to the safeguards needed to meet pension pledges. 2
New products straddle the boundary between occupational and private provisioning personalised work-related savings. In modern European labour markets where life-long job tenure is becoming very rare, workers should not be penalised on retirement for changing jobs during their professional life. One of my main tasks over the coming years will be to ensure that the European regulatory framework for financial services supports the emergence of secure market-driven responses to retirement financing. We must remove regulatory or tax bottlenecks so that assets earmarked for retirement can be managed as efficiently as possible: to allow Europeans to enjoy the highest possible payouts and annuities on retirement. My objective is to enable private pension providers to fairly compete on a pan- European basis. Efficiency gains should in turn lead to better and cheaper pensions. These providers should of course also respect adequate and harmonised prudential and conduct-of-business rules. European citizens would therefore also benefit from safer pensions. However, the Commission should only act where Member States cannot succeed on their own in providing sustainable and affordable pensions. I will, therefore, only start new initiatives where they provide a clear improvement of the current situation and only if EU action is necessary. EU action 1: Pension fund Directive As members of the Irish Association of Pension Funds I assume you are particularly interested in the Directive on Institutions for Occupational Retirement Provision, the Pension fund Directive. The objective of this Directive is to create an internal market for occupational pension funds. Member States must have implemented this Directive into national law by tomorrow. As to the timely implementation of the Directive, I can inform you that so far 9 Member States have notified the Commission of their implementing measures. This implies that regrettably as much as 16 Member States will be too late, although 2 years should have been sufficient to do the job. I am aware of the fact that for a number of Member States the absence of pension funds made implementation more difficult. Nonetheless, others are very close to finalising their work. I am therefore confident that before year end around 20 Member States will have implemented this important Directive. The potential benefits of the Directive are enormous I therefore intend to monitor very closely its implementation in Member States. To that end, my Services have already organised two meetings with Member States in the last year. The discussions focused on issues which could be a potential source of difficulty for the transposition and which could give rise to a diverging interpretation by Member States. The issues were identified by Member States themselves as well as by other stakeholders. In addition to the two meetings, many questions were raised by Member States on a bilateral basis. The main issue outstanding seems to be what is social and labour law applicable to the pension scheme? An important element of this Directive is the prudent person investment principle. It requires pension funds to invest in the best interest of members and beneficiaries and in such a way as to ensure the security, quality, liquidity and profitability of the portfolio as a whole. 3
Compared to life insurers and other institutional investors, pension funds have a much longer investment horizon, which can be up to 20-30 years. Therefore, they can take on much more equity risk than an individual ever could take. Hence, they are also the ideal institutions to invest in long term risk capital and venture capital markets. Although I am sure you all know this, I thought I ought to reiterate it since I receive some signals that indicate developments in another direction: less equity, more bonds. I am concerned national legislation forces pension funds to re-allocate investments, thereby possibly hampering the working of the Directive. The second important element of the Directive is the possibility of cross-border membership. This was only possible after agreement had been reached on the mutual recognition of prudential supervision, including the prudent person principle. We expect that, in particular, multinationals will want to benefit from this. It will give them the option to operate all pension schemes in one institution: the pan-european pension fund. The European Federation for Retirement Provision estimates that the total effect on a yearly basis of improved return, as a result of more investment freedom and combined scheme operations, could be close to EUR 10 billion. It had already become clear from the negotiations in the Council and in the European Parliament that the reference in this Directive to social and labour law applicable to pension schemes was a sensitive issue for Member States. I understand that the lack of a clear definition raises some concerns. However, the Directive intends to create an internal market for pension funds and it is my responsibility to make sure that we succeed in our objective. I will therefore not accept that Member States abuse the requirement for pension funds to comply with host Member State social and labour law in order to protect their pension market. Again, the potential benefits are just too big. The Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) is currently drafting a cooperation Protocol for pension supervisors. This Protocol will facilitate supervision of pension funds and the working of the Directive. I expect this Protocol to be adopted soon. At present not all Member States have pension funds. By developing best practices, CEIOPS will help preventing distortions of competition and facilitate cross-border membership. Next year, when all Member States will hopefully have implemented the Directive, we will organise a first meeting looking at some of the issues which have resulted from our examination of the implementing legislation. EU action 2: UCITS Review But our work on improving retirement financing does not stop with this Directive on occupational pensions: last July, the Commission adopted a Green Paper reviewing the EU framework for UCITS - investment funds which can be offered throughout the European Union. Currently, these funds manage some 4.3 trillion of assets or some 75% of the European investment fund industry s assets. In many Member States, investment funds and other private savings vehicles remain the main complement to state-provided pensions. It is vital that we identify, and where appropriate remove, unnecessary obstacles to the development of this important sector. 4
A series of studies remind us of the potential cost savings, if only we could exploit the economies of scale of a more integrated market. Cross-border mergers, fund pooling, enhanced freedom for the industry to organise itself on a pan-european basis or the development of common operational standards appear as possible solutions that need to be tested: are they viable? The means by which funds are distributed is beginning to change. New distribution models offer investors greater access to a wider range of products. However, this can entail additional layers of actors between the fund promoters and the investors, blurring the responsibilities towards consumers and increasing the cost of the product. What is the most appropriate framework for ensuring that investors receive the right level of protection? My initial response would be that the Markets in Financial Instruments Directive (MiFID) may serve as a guide to clarifying these boundaries and respective responsibilities of different actors within the value chain. The Commission paper also asks whether profound changes such as the growth of the alternative investment business - call for an EU-level response. I have made it clear on a number of occasions now that I am not in favour of an EU regime for hedge funds. I have seen the arguments for pursuing a more harmonised approach towards private placement rules for sophisticated investors and for looking carefully at whether retail investors are equipped to deal with the risks of some hedge fund based investments that are available to them. But I am far from persuaded that regulation in this area is either essential or desirable. Finally, the UCITS Green Paper considers the need for a coherent set of principles governing the sales and disclosure process for all private investment vehicles irrespective of whether they are packaged as investment funds, unit-linked life insurance or certificates. Many of these products replicate some UCITS features, but are subject to different regulatory or tax regimes. The Commission is concerned that this different regulatory treatment may distort investment decisions. While I believe that it is right to weigh the competitiveness of UCITS relative to other products, it would be a retrograde step for investors if UCITS safeguards were scaled back as a result of regulatory competition. We seek to understand the substance to these concerns. New products are continuously being designed to meet the needs of more discerning and more demanding investors. How can we support informed and enlightened choice by investors across different types of saving product? I invite you, pension experts, to respond to this Green Paper, for which the consultation will close on November 15th. We count on the high quality of the forthcoming responses as a means of moving forward. We need substantive analysis from you. What are the potential costs and benefits of the options presented in the Green Paper? We will then assess the case for eventual formal action in the light of the better regulation approach. Is there a single market failure, or an overwhelming regulatory risk? Which are the most cost-effective measures? Investment fund managers also provide asset management services to pension funds. Asset management is only one aspect of the pension business, but a very important one. We must ask ourselves whether we can better harness the skills of the asset management industry in order to increase pension savings returns without sacrificing the important tax, social and other features of the pension concept. The experience at Member State level shows that there is progress to be made in this regard. Your responses to the UCITS Green Paper will also help us to define the role and function of UCITS in an over-arching pension policy. 5
EU action 3: other initiatives Let me now turn to some other initiatives related to pensions. The functioning of the Pension fund Directive is closely linked to tax incentives. A large number of Member States did not allow tax deductions for contributions paid to institutions established in other Member States. I am happy to see that at present there is no tax obstacle for pension contributions paid to foreign pension funds from Ireland, Germany, Luxemburg, the Netherlands, Austria, Portugal and Finland. Soon this will also be the case for contributions from Belgium, Spain, France and the UK. Denmark will be the subject of the next ruling of the European Court of Justice (ECJ) on this issue. It may find it very difficult to explain to the ECJ why allowing crossborder deduction would ruin its pension taxation system, while so many other Member States have already shown that they could do it without any major difficulties. Italy and Sweden may still cross the bridge. Only Greece is unclear. The Commission is expected to start to examine the situation in the ten new Member States this year. A second related issue is the Proposal for a Directive on the Portability of Supplementary Pension Rights, which could be soon adopted by the Commission. The Proposal will address the three main obstacles to mobility created by supplementary pension schemes: the insufficient acquisition of pension rights because of long vesting periods, the lack of preservation of dormant rights in case a member leaves the scheme, and the impossibility to transfer acquired rights within and between Member States. The Directive, once it has been adopted and entered into force, will reinforce the impact of the Pension fund Directive and will also promote the creation of funded schemes. Lastly, the recent amendments to the Stability and Growth Pact have also taken account of pension reforms currently taking place, in particular in some of the new Member States. The Council acknowledged that special attention must be paid to pension reforms introducing a multi-pillar system that includes a mandatory, fully funded pillar. Although the implementation of these reforms leads to a short-term deterioration of the budgetary position, it clearly improves the long-term sustainability of public finances. It also improves sustainable and affordable pensions. Conclusion Ladies and gentlemen, to conclude: There is a pension time bomb, which needs to be defused. Some initiatives have already been taken. They provide an enhancement for occupational and individual pension provisioning. Individuals must take their future in hand. However, they need the support of sensible, sound and forward looking public policy action. The Commission, in close cooperation with the Council and the Parliament, will take its responsibility where it finds it to be appropriate. But the final responsibility is with Member States. They must implement the structural reforms that are necessary to protect elderly people, while preserving the soundness of public finances. I thank you for your attention and I am happy to take a few questions. 6