Asset managers warn Europe pension proposals could tilt funds to low yield and hit elderly

Proposals for European pensions that could implicitly favour low-yielding fixed income over long-term growth assets could leave Europe’s pensioners, already struggling with low rates and austerity, even worse off, asset managers say.

Pension groups and asset managers have said proposals for changes to European pension regulation could lead funds away from growth assets, crucial for pensions to reach long-term liabilities, and into lower returns in fixed income.

Their concern comes at a time yields on some core European government bonds are low, or even negative, and annuities rates are near all-time lows as interest rates seem set to stay ‘lower for longer’.

One contentious proposal Brussels has promulgated is to apply ‘tiering’ of assets, resembling Solvency II for insurance firms, to pensions.

Under the provisions for insurers, their capital requirements must be calibrated to the value at risk, marked to market, over a 12-month period.

The proposal, as applicable for pensions, was supported yesterday in technical advice Europe’s Insurance and Occupational Pension Authority submitted to Brussels.

But it has been opposed by various financial practitioners.

The Solvency II rules have the potential to redirect investment towards “lower return, fixed income assets such as government bonds, and away from equity and growth asset classes such as private equity and infrastructure”, said Europe’s Venture Capital Association.

Klaus Bjorn Rhune, chairman of the European Venture Capital Association, said: “Making it too costly to invest in long-term growth through say, private equity, venture capital or infrastructure is clearly not the way to defuse this bomb.

“In fact, by redirecting investment away from growing companies, it could make a bad situation much worse. The effect is further exacerbated by exaggerated risk weights [under Solvency II] attached to private equity, that fundamentally misinterpret the risk/reward ratio of this long-term, value-enhancing asset class.

“Imposing Solvency II requirements on pensions will affect occupational pension schemes abilities’ to meet their long-term liabilities and invest, through private equity and venture capital, in SMEs, innovation and growth.”

Ria Oomen-Ruijten, a member of the European Parliament, said: “The proposal on solvency requirements for pensions worries me. The European Commission wants more guarantees, but some member states have already lowered the grade of guarantee. More capital guarantee is difficult to give in a period of weak economic growth and pressure on the financial sector.”

Thomas Mann, German pensions expert and vice-chairman of the employment committee of the European Parliament, said: “I strictly oppose the application of Solvency II or other similar regimes to supplementary pension schemes, if this endangers successfully operating occupational systems. The Commission is on a very risky track, if it wants to penalise these systems. Many MEPs, governments, Trade Union Confederations and Employer Associations have already made it clear that they will not accept any endangerment.”

Joanne Segars, chief executive of Britain’s National Association of Pension Funds, said: “We are disappointed that Europe’s pensions and insurance regulator is still proposing Solvency II-type rules for pension schemes, even though its own advice now acknowledges the damage that would be done to European pensions, jobs and the wider economy.

“Solvency II would pile extra pressure on firms that are struggling to survive during these difficult times.”

The advice being submitted now by various bodies to the European Union will help the European Commission produce a final draft of the EU Pensions Directive, expected towards year’s end.

The European Commission is due to issue a white paper today covering various measures proposed to try to ensure European pensioners have “adequate and sustainable” income in retirement.


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