Introduction

Under its Action Plan for Capital Markets Union (CMU), the European Commission is consulting on possible measures for making new retail pension products available to consumers on an EU-wide basis. It is hoped that a new regime will benefit consumers by increasing competition among pension providers due to the lowering of barriers to market entry, and benefit pension providers by reducing costs through the realisation of economies of scale.

As part of its CMU efforts, the Commission has also targeted institutional occupational retirement pensions (IORPs) for change. The Commission is aiming to increase investment opportunities for IORPs, and to bring IORPs into the new securitisation regime. The Commission intends to offer opportunities to take additional exposure to corporate equity and debt, with a view to matching long term assets with liabilities.

This may dovetail with expected changes to the Institutions for Occupational Retirement Pension Provisions Directive, which could include a capital regime similar to that imposed on insurers under the Solvency II Directive.

New retail personal pension products

Throughout 2016, the Commission has been consulting on a new, EU-wide market for retail personal pension products, which could be available for opting into by pension providers. The aim is to explore ways to increase choices for retirement saving and provide economies of scale by moving to an EU-wide market. This will likely include measures to either harmonise or replace the patchwork of rules at the EU and national level, which the Commission believes stands in the way of the full development of a large and competitive market for personal pensions.

In April 2016, the European Insurance and Occupational Pensions Authority (EIOPA) provided to the Commission its final report on the development of a new product for personal pensions under a “29th” regime, as an alternative to harmonising existing national personal pension schemes. EIOPA’s proposal aims to encourage increased personal retirement saving at an EU level, and its main focus is on increasing consumer confidence and protection.

EIOPA is of the view that a standardised product and governance regime would best achieve its aims. Its report proposes the introduction of a standardised, pan-European personal pension product (PEPP), which could operate as a voluntary secondary regime alongside national personal pension regimes.

EIOPA’s report reflects feedback from market participants that a stand-alone authorisation regime for PEPPs could cause an excessive regulatory burden and lead to added costs. As a result, EIOPA recommends working within authorisation regimes that are available under existing legislation in order to keep the regulatory burden to a minimum. By focussing on a voluntary “29th” regime for disclosure and product specification but not authorisation or supervision, EIOPA proposes a halfway house between a fully-fledged parallel regime and tinkering with the status quo.

EIOPA proposes that the new PEPP include mandatory standardised elements in addition to a defined set of regulated but flexible elements. The proposed standardised elements include high level investment principles, a single default investment option with a limited number of alternative investment choices and the ability to switch providers with minimal (or at least transparent) charges. The “flexible” elements would include the addition of biometric risk cover, including minimum return guarantees and offering the choice of a retirement date.

EIOPA hopes that these standardised and flexible elements will help to strike the necessary balance between consumer protection and consumer choice. EIOPA’s report acknowledges that caps on costs and charges by providers might impede competition; however, it also says that such caps may still be necessary to protect consumer interests.

Standardised governance measures may be implemented to strike a balance between the level of product security and consumer risk appetite. Suggested measures include requiring that providers remove as much complexity as possible in the development and marketing of PEPPs. EIOPA’s report suggests that the starting point for disclosure during the pre-contractual phase could be the key disclosure document required for packaged retail and insurance-based investment products (PRIIPs) under the PRIIPs Regulation (Regulation 1286/2014).

The Commission’s consultation closes on 31 October 2016. We expect to see in early 2017 some indication as to the extent to which the Commission adopts EIOPA’s recommendations.

Occupational pensions to join the new Securitisation Regulation regime

Separately, a proposed regulation on securitisation (the Securitisation Regulation) is currently undergoing “trilogue” negotiations between the Commission, European Council and European Parliament. Once adopted, the Securitisation Regulation may extend the application of due diligence requirements to IORPs that currently apply to banks under the Capital Requirements Regulation. In addition, with the introduction of positive requirements for issuers, all investors (including IORPs) will be required to verify the satisfaction of those positive issuer obligations by the issuer of asset-backed securities.

It will be the responsibility of IORPs to double check that issuers have complied with the various detailed transaction structuring, documentation and transparency requirements. This suggests that making investment decisions in respect of securitisations will not be quick or inexpensive. Rather, IORPs will need to ensure they have sufficiently documented (and observed) processes in place to ensure that any securitisation they invest in meets all the requirements imposed not only on the IORP, but also the issuer.

What the penalty will be for IORPs that fail to comply with such due diligence requirements is not yet clear. The draft prudential securitisation regulation published along with the Securitisation Regulation only applies to credit institutions and investment firms. However, a second directive on the activities and supervision of IORPs is expected later this year, which may aim to impose a new solvency capital regime on IORPs.

Concluding remarks

At this stage, it is unclear whether CMU changes to pensions will involve a new IORP passporting regime, the harmonisation of existing national rules, or the creation of a “29th” regulatory regime to run in parallel to existing national rules.

It is worth bearing in mind that the Commission may not adopt EIOPA’s report in its entirety, and the report is limited in scope to PEPP products. If the Commission does accept EIOPA’s recommendations, then the result may be a voluntary hybrid “29th minus” regime affecting disclosure and product regulation but not authorisation or supervision.

There may be benefits for IORPs under the Securitization Regulation, which will create a new category of “simple, transparent and standardized” (STS) securitizations. Increased product transparency and simplicity will indirectly benefit IORPs. While STS securitizations will be afforded slightly better capital treatment for banks, and eventually insurers, it is too soon to say whether STS securitizations will garner preferential capital treatment under a new regime for IORPs.