The European Commission’s sustainability goals risk not being achieved if EU financial regulation restricts pension fund investment in risky assets, the CEO of Europe’s occupational pension fund association has suggested.

Speaking at a Eurosif event in Brussels on Monday, Matti Leppälä of PensionsEurope said: “ESG will not happen if everything is in euro-denominated government bonds.”

“You have to be able to take risk to be able to get real returns, have growth in the real economy, have good employment, and then make the necessary investments into infrastructure, into impact investing, into private equity,” he added.

PensionsEurope has been concerned with a trend in European regulation “to harmonise everything on a short-term time horizon”, he said.

The Solvency II directive, which covered half of the European pension market, had pushed pension insurance companies “almost totally” out of equity investments, said Leppälä.

In June a survey by the trade association InsuranceEurope found that almost half (48%) of insurers across Europe said Solvency II had led them to invest “less than optimum amounts in equities, long-term bonds, private placements or unrated debt”.

Pension funds, noted Leppälä, had successfully resisted such regulation, so in countries such as the Netherlands they were continuing to invest in the real economy and for the long-term.

That, said Leppälä, was the transition that needed to take place.

He hoped that “in the end there will be a re-evaluation of the financial market regulatory framework”, and that there would not be – as there had been previously – a push to include pension funds in the same financial framework as banks and insurance companies.

Restrictive capital requirements

Elaborating on his comments in Brussels, Leppälä told IPE that if pension funds were faced with similar risk-based capital requirements as those for insurance companies under Solvency II, their equity investments would be very limited – as would other investments considered risky such as private equity, venture capital, infrastructure and real estate.

These types of investment were “crucial for ESG and sustainable finance”, he added.

PensionsEurope is lobbying against the introduction of delegated acts in the EU pension fund directive as part of the Commission’s package of sustainable finance measures.

Some of its members fear that this could pave the way for the introduction of Solvency II requirements for pension funds. The industry successfully lobbied against this in the process leading to the new EU pension fund directive, IORP II, but remains on its guard.

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