Pensions - Articles - Towards a real single market for occupational pensions

 Speech by Michel Barnier, Member of the European Commission, responsible for Internal Market and Services.
 Public hearing on the revision of the Directive on occupational pensions

 Brussels, 1st March 2012

 Ladies and Gentlemen,

 Good morning to you all. I know that you are the best European experts in the field of pension funds and I thank you for coming in such large numbers to participate in a discussion which I am sure will be productive.

 Today's conference is an essential step for the Commission in our preparations of the revision of the Pension Funds Directive. I would like to express my thanks to my Directorate General and in particular to Karel van Hulle, head of unit for insurance and pensions, his Director Mario Nava and all their colleagues for having organised this public hearing.

 I also know that the revision of the Pension Funds Directive is a source of concern for many of you.

 I have to say that the press does little to allay these concerns. Some newspapers claim that the revision of the Directive will cost European businesses EUR 800 billion or more. They also claim that an extension of the Solvency II Directive to cover pension funds is planned and would abolish defined-benefit occupational pension schemes.

 In order to dispel such hyperbole, I would like to begin by providing the following clarifications.

 Firstly, by way of warning against jumping the gun, I would point out that we have not yet put forward any proposals!

 Secondly, I would clarify that I have never said or implied that pension funds could be subject to exactly the same rules as those set out under Solvency II. If that had been our intention, we would have made the proposal back in 2007 when we were submitting the Solvency II Directive. We did not do so because we are aware of the key role played by occupational pensions in the Member States' pension schemes.

 Having made these clarifications, I would point out that it seems clear to me that we cannot stand idly by:

 We are all aware of the demographic trends which oblige us to take action in order to ensure that those who retire in the future will have decent pensions.

 The succession of crises which we are experiencing brings home to us the need for robust rules to protect pensioners and enable pension funds to perform their role of economic stabilisers.

 In this context, two weeks ago, the Commission, under the authority of my colleague, László Andor, adopted a White Paper on pensions which includes a set of initiatives aimed at providing effective European support for measures planned by the Member States.

 The revision of the Pension Funds Directive is in keeping with this approach. We want to strengthen the single market in order to offer businesses and workers a greater choice of occupational pensions.

 I know that the sensitive nature of the subject requires the utmost prudence and that is why I will be paying very close attention to the exchanges which will take place today.

 By way of introduction to these exchanges, I would now like to outline the five reasons why I believe that the revision of the Directive will help us to benefit from a more modern legislative framework better adapted to current socio-economic requirements.

 1. First reason: The revision of the Pension Funds Directive can contribute to growth and employment and make better use of the Single Market.

 Firstly, as regards supply, occupational pensions are generally provided by employers in the form of deferred remuneration. This is a way for businesses to reduce the cost of staff turnover and to boost productivity.

 It could be in the interests of businesses operating in several European countries to pool partly or fully their pension schemes into one single pension fund. However, of the 120 000 pension funds in Europe, only 84 are cross-border funds.

 The costs linked to the complexity of the regulatory and administrative framework prevent businesses from taking full advantage of the benefits of the single market.

 We want to facilitate economies of scale, risk diversification and innovation in order to enable businesses to reduce their costs and to simplify governance of their pension funds.

 This would make it possible to free up capital in order to finance productive investment projects.

 As regards demand, workers wish to be informed and advised about their pensions in order to maintain their standard of living throughout their lives.

 By boosting consumer confidence, the revision of the prudential rules for pension funds could increase demand and stimulate economic growth.

 Moreover, revision of the Directive could reduce the costs linked to retirement pensions for those who wish to work in another Member State, and thus promote the mobility of workers, which is another factor of growth and employment.

 2. Second reason for revising the Directive: Promoting long-term investment.

 It is essential that prudential rules take into account the key role played by pension funds in promoting long-term investment.

 The current work on insurance products with a long-term guarantee regulated by the Solvency II Directive also serves the same end.

 In so far as insurance products and pension schemes are comparable, the regulatory framework should be similar.

 A valuation of assets and liabilities based on their market prices is needed in order to identify the risks involved. However, regulation must shield liabilities against excessive volatility and allow supervision authorities sufficient time to avoid pro-cyclical responses.

 Given that, in some Member States, pension funds invest substantial amounts in shares, it is important to ensure sound calibration of the risks involved in defined-benefit schemes.

 As regards defined-contribution schemes, although investment policy may be determined by the members, it is essential to ensure transparency and good governance.

 3. Third: The revision of the Directive can contribute to the sustainability of the Member States' public finances.

 The White Paper on pensions shows that pensions already account for a very large proportion of public spending: 10% of GDP on average today, possibly rising to 12.5% in 2060.

 In view of this trend, the Member States must have the option to provide citizens and businesses with mixed schemes based on three solid pillars; namely, statutory pensions, occupational pensions and individual pensions. It is by making different options available that adequate pensions can be ensured, while enabling citizens to diversify their income.

 Revision of the Directive would allow the occupational pension pillar to be strengthened, thereby relieving the pressure on public finances and leading to greater economic efficiency.

 4. Fourth reason for revising the Directive: To take better account of the specific characteristics of pension funds.

 The financial crisis has brought to our attention the risks to pension funds and the need for robust solvency rules.

 As in the other financial sectors, supervision based on qualitative criteria is required: good governance, risk management and transparency.

 As for the quantitative aspects, in particular capital requirements, these must reflect the reality of pension funds. We need a modern approach based on economic substance rather than the legal form:

 In particular, when it is the pension fund itself which underwrites the risks, the solvency rules must take into account the risk-reduction mechanisms, such as recourse to supplementary contributions, conditional indexation, the possibility of re-negotiating pension schemes and affiliation to guarantee systems. This is not happening at the moment.

 Moreover, in some Member States, the risks are underwritten by the sponsoring business rather than the pension fund. Within the single market, it is important to be able to compare the financial health of all the pension funds, whether or not they are subject to capital requirements. We therefore intend to develop a common prudential tool for all pension funds in order to evaluate the financial positions of these funds.

 As you can see, our objective is to develop, in close collaboration with the supervisors and stakeholders, regulation which is both intelligent and effective.

 The 'holistic' prudential balance sheet proposed by the European Insurance and Occupational Pensions Authority (EIOPA) is a useful supervision principle. We now have to discuss how to put this principle into practice.

 In any case, the revision of the Directive must enable us to face the challenges ahead.

 The greatest of these challenges is a legacy of the past: Promises of defined-benefit schemes were sometimes made while underestimating the true costs involved. It would probably not be feasible to immediately apply stricter rules to the outstanding liabilities of pension funds. We must therefore find alternative solutions, including appropriate transitional arrangements.

 The problem will be less severe in the future because the majority of businesses are setting up defined-contribution schemes, where the employees bear the risk. That said, these schemes must also be regulated, just like the hybrid schemes, where the distinction between defined benefits and defined contributions is increasingly blurred.

 5. The fifth reason is that the Directive needs to be revised in order to maintain a level playing field for regulatory competition.

 As you know, pension funds and insurance companies are very closely interlinked.

 There is competition between pension funds and insurance companies for providing occupational pensions not only among the Member States but also within some countries.

 Moreover, some insurance companies set up branches to market pension funds.

 Pension funds, for their part, often transfer their longevity risk to the insurance and reinsurance sector.

 Lastly, defined-contribution pension schemes which allow capital to be accumulated throughout working life often go hand in hand with insurance products in retirement. In some Member States, pensioners have the option of purchasing a life annuity from an insurance company to manage their capital.

 It is therefore essential to maintain a level playing field for regulatory competition not only at cross-border level - in order to avoid undermining potential competition in the single market - but also at national level.

 I want to state very clearly that I have no intention of penalising either pension funds or insurance companies.

 We are going to propose a regulatory framework specifically for pension funds, but this will not be done with a 'silo mentality'. We must draw on the rules developed in other financial sectors, in particular some useful aspects of Solvency II.

 Ladies and Gentlemen,

 I would like to make three concluding comments:

 1. Although we will draw on the approach of Solvency II, there is no question of 'copying and pasting' this approach onto the pension funds sector.

 2. Pension funds in the various Member States have different characteristics. Nor is there any question of penalising systems which are working well.

 3. We are steering a steady course, but we are not going to make any hasty decisions:

 The Commission is making rigorous efforts in this area.

 We are looking at a large number of options, the advantages and disadvantages of which we will discuss with you.

 We are working closely with EIOPA, and its chairman Gabriel Bernardino will shortly explain to us the key aspects of the technical opinion he has recently submitted.

 We will ask EIOPA to carry out a quantitative impact assessment study over the coming months in order to accurately estimate the costs and benefits of the main options.

 I am certain that all this will enable us to prepare a fair and proportionate legislative proposal and to improve the European regulatory framework for pension funds without jeopardising the competitiveness of the European economy.

 A real single market for occupational pensions means lower costs for employers, more choice and security for workers and a solid pension pillar to help the Member States to maintain sustainable public finances.

 However, in order to achieve this outcome, everyone must be open to change. No national system is perfect. I would invite you to consider the revision of the Directive as an opportunity to improve the national approaches.

 A pension scheme is a solidarity pact par excellence. Let us show our solidarity at European level.

 Thank you for your attention.