Back in May the industry breathed a collective sigh of relief when EU Commissioner Michel Barnier announced the Commission would not include proposals to introduce new solvency rules for pension schemes in the new Directive on Institutions for Occupational Retirement Provision (IORP directive).
Great news for pension schemes, but it is worth noting that the proposals were only ‘shelved’. As Barnier went on to say it will become a task for the next commissioner taking office in November 2014, presumably meaning the Commission still wants to see a level playing field for schemes across the EU.
But there are two conflicting messages coming out of the EU because there is also an EU Green Paper currently doing the rounds on long-term financing, which says: “The capacity of the economy to make such long-term financing available depends on the ability of the financial system to channel the savings of governments, corporates and households effectively and efficiently to the right users and uses. This can be carried out by various intermediaries (e.g. banks, insurers and pension funds) and by direct access to capital markets.”
The paper is effectively urging institutions to be long-term investors, but the Commission is also saying long-dated asset classes such as infrastructure would rate as risky on the ‘holistic balance sheet’.
Investors would be forgiven for feeling confused at this juncture and will be inclined to say “thanks, but no thanks” when confronted with asset classes such as infrastructure when in fact they should be making the most of the illiquidity premium as long-term investors – especially with banks unwinding their balance sheets.
Incidentally, JP Morgan Asset Management published research this week saying Solvency II paints infrastructure with too broad a brush and misses an opportunity to distinguish between the diverse styles of infrastructure investing that carry very different expected risk/return profiles.
Quite right. The bigger issue for the Commission is surely the fact that 60% of the EU population have no access to a workplace pension, not whether or not schemes and insurers carry too much risk in their portfolios.
Let’s just hope the next European Commission doesn’t revive the burdensome capital requirements and that Solvency II remains on the shelf for long enough to get lost under all the dust.
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