Madrid compromise over pension investment wins support

Date: 02/05/02

By Peter Chapman

SPAIN has won the backing of the EU's biggest insurance market for new proposals designed to break the deadlock over European company pension rules.

Member states have clashed for more than a year over the level of freedom that should be given to fund managers when making investment decisions.

The idea behind the proposals from Single Market Commissioner Frits Bolkestein is to cut red tape for firms wishing to have just one pension fund for all their employees, regardless of where they work in Europe.

Bolkestein had threatened to withdraw his proposal if member states pressed for a regime that would add to the regulatory burden faced by fund managers in the UK, Ireland and Netherlands - which have the most liberal regimes and successful private pension markets.

But the Association of British Insurers, whose members have investments worth €1.8 billion, said this week the industry 'could live' with a flexible solution tabled by Madrid.

Its EU affairs manager Simon Gentry said: 'We think this is a reasonable and balanced compromise. It doesn't deliver a true single market for occupational pensions but it's a step in the right direction.'

The UK, Ireland and Netherlands backed the original Commission proposals that would have allowed fund managers to invest according to the 'prudent person principle'.

However, other member states opposed the proposals because they fear they offer insufficient investor protection for pensioners and give fund managers carte blanche to fritter away pensions on risky investments.

Madrid's compromise would allow each country to impose strict restrictions if it wished.

Take the case of a multinational with offices in Paris, London and Amsterdam, with a pension fund managed in the French capital: assuming France had stricter rules, they would apply even for employees working in London or Amsterdam.

But if the same company opted to put its pension fund in the Netherlands - which has the prudent person approach - French regulators would have scope for demanding higher levels of protection for French-based workers.

Regulators would be able to insist that foreign-run pension funds for its nationals were subject to a 70 ceiling on equities investments and a limit of 30 on investments in a 'non-matching' or foreign currency.

'They would be in the same fund but you would have a slightly different investment strategy,' said Gentry.

However, firms were less happy about a 'technically impossible' provision that required pensions to be fully funded at all times, he said.

Under the provision, a pension fund would always have to have assets worth 100 of its liabilities available.

'Say you had 100 of the money on 11 September - on 12 September you would be unfunded,' said Gentry. 'They will have to build in some new wording on that.'

EU diplomats said they would debate the issue on 16 May - ahead of the 4 June meeting of the Union's finance ministers.

Spain has won the backing of the EU's biggest insurance market for new proposals designed to break the deadlock over European company pension rules.