EUROPEAN COMMISSION Directorate-General for Financial Stability, Financial Services and Capital Markets Union NOTE FOR THE ATTENTION OF THE EPERT GROUP ON BARRIERS TO FREE MOVEMENT OF CAPITAL - discussion document for the meeting on the 28 th of September 2016- RE: Pension funds' investment restrictions Summary of replies to questionnaire The Commission services addressed a questionnaire on pension funds' investment restrictions to all members of the Expert Group and 19 replies have been received so far. Following the analysis of the responses, it became apparent that pension systems across the EU vary in many aspects and that investment restrictions imposed by national law may therefore be, at least to a large extent, justified by the different national conditions. The main differences between pension fund systems consist in: Pension pillars used and/or to which restrictions apply, Use of insurance saving schemes under Solvency II Directive, Interest or other guarantees provided to the members of the pension funds (future pensioners), responsibility of the employer, the size of assets pension funds manage (e.g. NL pension funds manage assets of more than 150% of GDP; on the other hand HU pension funds manage assets of less than 2% of their GDP), the size of pension funds, different products pension funds offer (one product fits all or allowing members to choose from conservative funds, balanced funds, voluntary funds, etc.), and the different cultures and different perception of risks. The pillars used and referred to by Member States (MS) in their replies (except the state-based pillar I): 1
Pillar Ibis is used by only a few countries. It is a pillar which is from the investment point of view the most regulated. It substitutes to a certain extent the state-based pillar I and therefore very prudent criteria are applied to the investment choices of such pension funds. Pillar II is used in many countries. So is pillar III, but not all MS reported the use of this pillar as voluntary pension schemes are often insurance schemes governed by Solvency II Directive. The main reported reasons for restrictions: MS Pillar Ibis Pillar II Pillar III BE BG CZ DK DE EE ES HR CY LV LT HU MT NL AT PL PT FI () SE Member States referred to prudential considerations in the first place and some of them mentioned other country-specific reasons: Diversification of the pension funds portfolios and the limitation of exposure to certain classes of assets or a single issuer, securing the nominal value of an investment; Avoidance of risk-taking, providing solvency margin; Managing the risk tolerance of the target fund members e.g.: pillar Ibis needs to meet the low risk expected by the pension fund beneficiaries; Providing different choices between investment strategies - conservative or other scenarios; Assuring that also small and medium size pension fund entrepreneurs who are not professional investors invest responsibly; Allowing for monitoring of investments in a relatively easy and straightforward way; Allowing investments to alternatives (infrastructure, precious metals, private equity); Providing quality, profitability and liquidity; Reducing the risk of conflicts of interest. MS did not communicate about plans to ease restrictions. A few countries are looking into certain aspects of the legislation, but the investment restrictions are not of immediate concern. 2
Investment possibilities across EU: As regards foreign investment, most MS restrict investment to third countries outside EU, EEA and OECD. AT, BE, NL and MT do not apply any limitations to third countries. BG limits the investment possibilities to EU and EEA only. PL allows only 30% of assets to be invested outside PL and only in the EU and OECD countries. DE, AT, BG, PT apply restrictions on foreign currency investment at the level of 30%, DK 20% (but DK applies restrictions only to a very low number of pension funds as most pension funds operate under Solvency II Directive). CY limits investment into a single foreign currency to 10%. LV limits investments in currencies unmatched to the obligations. We have not found any major investment restrictions that would aim to limit cross-border investment in the EU 1 (disregarding the national legislation limiting investments in asset classes, etc.). The foreign currency investment restrictions seem to be in line with the IORP Directive. And limitations for investment outside EU do not fall in the scope of our work. Investing in long-term private projects Most MS responded that investment in long-term private projects is possible as long as the investment is in accordance with the prudent person principle and with the reported investment restrictions on asset classes and investments to a single issuer. HR reported that cross-border private project investment is not possible. The possibilities of such investments are sometimes however limited to financing via bonds (BG), or via bonds and shares admitted to trading on a regulated market (CZ). DE allows to invest in private projects using debt instruments or equity instruments or to invest indirectly in infrastructure using open-end funds and closed-end funds. NL and DK pension funds have a lot of experience in investing in private projects crossborder. Such investment can have different forms: investment in shares, in private funds, investment in public-private partnership projects, lending or co-lending, etc. They follow prudent person rules and look for opportunities abroad with low risk and return margins that are interesting on a long-term basis. The Commission services believe that there is scope for sharing best practice and that MS could learn from the investment experience of some pension funds managing large size of assets. Overview of the reported restrictions: 1. Pillar I bis restrictions: MS using this pillar regulate to a large extent the investment of the pillar I pension funds and seem to do so with the aim to avoid risks and safeguard the nominal value of the investment. 1 BG has a restriction that might need to be looked at, it concerns investment into mortgage bonds which seems to be limited to "domestic" mortgage bonds. HR reported that there is no possibility of investing in cross-border private projects. More clarity about this restriction should be provided. 3
MS Selected main restrictions Foreign currency limit Geographical limitations HR 3 categories of pension funds - A, B, C: Category A at least 55% of net asset value invested to equity, for category B 35% and for category C investment to equity is not allowed - (obligation of listing on regulated markets). Detailed limits exist also for other asset classes. Shares admitted to trading on a regulated market = 20%; shares not admitted to trading on a regulated market = 0%; real estate 10%; corporate bonds (admitted to trading) = 25%; EU + EEA, regarding non-eu BG Mortgage bonds (domestic) = 30%; countries limits specified in 30% foreign currency limit Infrastructure bonds = 10%; an ordinance of the national (other than BGN and EUR) shares and units of UCITS = 15%; competent authority. shares of special investment purpose companies for real estate or debt securitisation = 5%; 0% loans, 0% private investment funds, 25 % bank deposit (banks with a min credit rating) PL LV LT EE Equity no limit, but government bonds forbidden, municipal bonds 40 %, corporate bonds 40 %, Real estate 0 %, private investment funds 0 %, loans- 1,5 %, retail investment funds -10 to 15 %. Only regulated markets: Equity: 50%, private investment funds 10%, loans 0%, 0 % real estate Conservative funds - 0% equity, 0 % real estate, 0 % loans, retail investment funds 100 % and private investment funds 20 % but only those that invest in bonds and bills issued by public administration, public bonds no limit Other funds - 0 % real estate, 0 % loans, 20 % private investment funds, no limit for bonds, equity and retail investment funds Equity = 75%, conservative funds = 0% Public bonds: 35% to a single country Corporate bonds: no limit if listed; 30% if unlisted 10% real estate, 50% retail investment funds/50% private investment funds, loans 10% Limitations for investments in currencies unmatched to the obligations - 10% in single currency/ 30% in total. EU+EEA+OECD, but only 30% (there are no cross-border investments made by pension funds from Poland) EU+EEA+OECD (only regulated markets) Pension funds can freely invest in other EU Member States, however, the possibility to invest in third countries is limited. Limit for public bonds: 35% to a single country 2. Pillar II restrictions Article 18 of the IORP Directive 2003/41 sets the investment rules applicable to the II pension pillar. It applies general prudent rules, stipulates that assets shall be invested mainly on regulated markets, that excessive risk concentration should be avoided and that investment in derivative instruments shall be possible only if they contribute to a reduction of investment risks. Further, MS shall not prevent institutions from: investing 70% of the assets in shares and corporate bonds admitted to trading on regulated markets. MS may apply a lower limit to institutions which provide retirement products with a long-term interest rate guarantee (bear the investment risk), investing up to 30% of the assets in assets denominated in currencies other than those in which the liabilities are expressed. The following table shows in the column marked red the countries that apply stricter limits than 70% limit on investment to shares and in the column marked green countries with less strict limits. 4
MS HR DE FI Limits stricter Equity 10%, corporate bonds 10%, retail investment funds 10%, government bonds of other countries than EU and OECD countries 10 % Pensionskassen: limit for listed equity = 35%, unlisted 15%, 50% on bonds, 25% real estate, 50 bank deposit, 7.5% hedge funds + funds with commodity related risks, closeend funds 15% Listed equity = 50%, non-listed equity = 10%, real estate 40%, corporate bonds on regulated OECD markets 50%, other companies' bonds 10%. Limits less strict Foreign currency limit Geographical limitations Eu+OECD (No cross-border private project investment) Pensionfonds - no limit 30% EU+EEA+OECD EU+EEA+OECD + 10% of assets covering technical provisions ca be invested in other 3rd countries Pension funds characteristics Occupational pension funds do not provide longterm interest guarantee Pension funds are very small and managed by small or medium size entrepreneurs which are not professional investors, they provide db schemes. AU BG SE PT Equity 70% and 50% if minimum guarantees provided by pension funds. 70% limit on corporate bonds. Shares not admitted to trading on a regulated market = 0%, real estate 10%, private investment funds 0%, loans 0%. Limit for unquoted equity 10%, unquoted bonds 10%, unquoted loans 10% Limit for investments not traded in an EU and OECD regulated market - 15% 30% 30% foreign currency limit (other than BGN and EUR) 30%, may be exceeded if the currency risk is hedged EU+EEA Assets covering technical provisions: must be located within the EEA Pension funds provide minimum guarantees Pension funds provide interest rate guarantees, employers have ultimate responsibility in case of db schemes Limit for investments not db schemes or dc schemes traded in an EU and with financial guarantees OECD regulated market = 15%. PL ES MT Limits on real estate: 0%, private investment fund: 0%, loans: 1.5% Limit for securities not admitted to be traded on a regulated market = 30%, real estate and loans together 30%, limit for bonds not admitted to be traded on a regulated market = 30% 30% limit on shares or debt securities traded on non-regulated markets, 30 % real estate, no private investment fund, no loans allowed EU+EEA+OECD, but only 30% CY Limit of 70% applies to total investment in shares, negotiable securities treated as shares and corporate bonds admitted to trading on regulated markets.limit of 40% applies to total investment in nonregulated markets. 10% limit applies to investments in a single foreign currency Bank deposits: If the banking institution is not situated in Cyprus or EU then a 10% restriction applies. DK BE NL Equity 70%, 70% to non-government bonds, 70% to retail investment funds, 10% to private investment funds No limit No limit 20% EU + OECD These restrictions apply to only a limited number of pension funds. Most of them are govern by Solvency II. Pension funds do not provide any guarantees. 5
3. Pillar III restrictions: MS usually refer to the UCITS Directive when justifying some of the restrictions. The restrictions are mainly on shares not traded on regulated markets, not listed shares, on real estate, etc. Only HR and HU seem to apply rather strict limitations. CZ provides two investment options: conservative fund with very strict conditions for investment and non-conservative fund which is rather free in terms of investment choices. MS HR HU CR PT Limits stricter Equity 10%, corporate bonds 10%, retail investment funds 10%, government bonds of other countries than EU and OECD countries 10 % Listed equity: no limit, non-listed equity: 5%, real estate: 10% directly or through real estate investment funds, Hungarian and foreign corporate and municipalities bonds together: 30%, private investment funds: 5% (Conventional portfolio: 0%. Balanced portfolio: max. 3%), loans 0-5%. Voluntary conservative fund : 0 % equity, 0 % real estate, non-eu and non-oecd public bonds= 30% (Direct); Limit for corporate bonds: 30 %, 30 % retail investment funds, 0 % privated investment funds, no loans Other voluntary funds : Equity traded on regulated markets : no limit, nonregulated markets limit 0 %, 0 % real estate, bonds only if traded on regulated markets, UCITs funds 60 %, non-ucits funds 20 %, 0 % private investment funds, no loans 55 % equity, 20 % real estate, 5 % non harmonised funds, 20 % loans, 20 % bank deposits Limits less strict Foreign currency limit Conventional portfolio: 5%. Balanced portfolio: 20%. Growth portfolio: 35%. 30%, may be exceeded if the currency risk is hedged Geographical limitations (no cross-border private project investment) Pension funds characteristics Eu+OECD + the ratio of DC schemes, 3 investments in nonportfolios: OECD countries shall not convetional, balanced exceed 20% of the and growth foreign investments Bonds and shares have to be admitted to trading on a regulated market and the pension fund should not invest more than 5 % of its assets into a single issuer. Limit for investments not traded in an EU/OECD regulated market = 10%. db schemes or dc schemes with financial guarantees BG SE Limit for shares not admitted to trading on a regulated market = 0%, limit on real estate 10%, private investment funds 0%, loans 0%. Limit for unquoted equity 10%, unquoted bonds 10%, unquoted loans 10% 30% foreign currency limit (other than BGN and EUR) EU+EEA Assets covering technical provisions: must be located within the EEA Pension funds provide interest rate guarantees LV Only regulated markets: 15 % real estate, only UCITS funds allowed, loans 0% Net foreign exchange position - 10% in single currency/ 20% in total EU+EEA+OECD (only regulated markets) ES Limit for securities not admitted to tradeding on a regulated market = 30%, real estate and loans together 30%, limit for bonds not admitted to trading on a regulated market = 30% Same limitations as per Pillar II CY EE LT MT Life Insurance - there are no restrictions for their investments, except for those funds which relate to unit-linked policies. No equity limit, 20 % real estate, public bonds: 35% to a single country, non-listed corporate bonds 30%, 50% retail investment funds, 50% private investment funds, loans 10% Equity no limit, bonds no limit, 0 % real estate, 0 % loans, 30 % private investment funds. No limit 6 10% limit applies to investments in a single foreign currency Bank deposits: If banking institution is not situated in CY/EU then a 10% restriction applies. Limit for public bonds: 35% to a single country EU, the possibility to invest in third countries is limited. Small size of the majority of pension funds, they bare the risk
Points for discussion 1. Do you agree that the above reported national restrictions could be justified by prudential rules or do you believe that certain restrictions in some countries are too restrictive and that Member States should aim to ease the restrictions? 2. Do you think that there is a potential for increasing the investment of pension funds to long-term private projects, financing the economy across Europe? 3. If your answer to question 2 is yes, what would you think are the best methods for sharing best practices? 4. Would you have other suggestions on what the group should focus in terms of promoting cross-border investments by pension funds? 7