IPE asked three pension funds in three countries - in Austria, the Netherlands and Finland - the same question: ‘Is there or should there be a basic European template that could be adopted for pension fund governance or should it be left to national
practice?’ Here are their answers:
Günther Schiendl, head of investments at APK Pensionskasse AG, which has assets under management of €2bn
“It is a tricky question that covers a lot of ground. I think that from basic principles of what pension funds should do now, that yes, there is a place for a common code.
“But further than that I tend to be sceptical because on the details and the implementation of structures there are so many differences. So I think that some more time is needed before it can be addressed, with all pension funds on a similar scale.
“It will take time for European pension funds to be truly comparable because there are still too many disparities, including in regulations, practices, the contracts between plan sponsors and pension funds.
“Then there are various types of plans - defined benefit, defined contribution and hybrids, mandatory or voluntary plans - that all have different characteristics and different ultimate risk bearers. Add national tax and labour laws and there almost certainly will be tricky details with consequences that can’t be ignored.
“From above, the EU pensions directive will be a factor. It will identify and then close some holes that might have been left in national regulations, and this will be associated with a process of rethinking or optimising some of the characteristics of pension funds decision-making, operations and communication.
“And one elements that the pensions directive has introduced is that pension funds are now obliged to make public their statements of investment principles.
“This will contribute to more transparency and more knowledge about pension funds, and step-by-step this will certainly act as a catalyst to build more awareness among pension plan members of what their pension fund is for and what their role can or shall be in the fund.
“This in turn should lead to more awareness among plan members and once they are deeper involved, decision making structures are up for a re-assessment.
“I don’t see bottom-up pressure for more governance from people moving job, and therefore pensions, from country to country. I fear they won’t bring enough pressure to bear, this might still for some time be rather an individual factor.
“I think rather the need for a common governance code will arise rather from a combination of local demand because of greater understanding and awareness with the pensions directive and possibly further directive as a guidance.”
Petri Kuusisto, outgoing director of investments at Finland’s Varma, which has €23bn assets under management
“It depends what you mean by a template. Obviously if one is thinking about a very detailed governance code as you find in some European countries or something like the Sarbanes-Oxley Act in the US I don’t think it is realistic, and therefore would not be very useful. But certainly something like the OECD code of pension fund governance has some general thoughts on what are the items that one should include in a pension fund governance guidance, notably how one should create the governance structure and how the decision making should be done. So a template at that level could be created.
“Europe definitely has a pension challenge, although as some countries face a bigger problem than others I don’t think there is a unified solution. The OECD pension fund governance rules are rather general, but they should be because you don’t solve a pension finance or governance problem through legislation. Passing legislation at a European level would be a negative development because there is such a long way to go before the harmonisation of pensions in Europe is feasible.
“However, there is a growing awareness that something needs to be done about pension fund governance.
“We have seen a shift to DC to reduce the risk that companies are facing from their pension fund. But they were happy in the 1990s when returns were good to take contribution holidays and then were surprised at their risk level when there was the market decline.
“But in the long run employees are not going to be very happy with the situation where the employer’s risk is pushed over to them. I think some day we will see the pendulum swing back, with some employers with good management, good governance and care of their stakeholders clarifying their objectives and re-assessing the kind of structure needed to run a pension fund so that employees’ views are properly resented and where conflicts of interest like the contribution holidays are avoided.
“Where it comes to a question of the solvency of a pension fund and the solvency of a company we are looking at very complex issues because people usually want to keep their jobs. We need some mechanism to encompass all these issues.
“So if one thinks about how complex pension issues can be it’s very relevant that there should be demands for a certain level of transparency in the system and among pension arrangements. That’s a crucial starting point because, for example, when people are considering changing jobs from one country to another it would be very helpful if they could understand their pension rights without spending weeks tackling it.
“DC plans have done a lot of research on how one should arrangement the communications structure in a pension fund. So there are similar sets of rules that one could apply in different European countries, and the OECD code touches on those issues.
“But then, each European country should take a look at those and try to apply them in the most appropriate manner. Europe is far from a harmonised pensions system so I think one needs to apply any code, whether it’s at European or OECD level.”
Adri van der Wurff, member of the board of Cordares which administers the assets and liabilities of several Dutch company and industry-wide pension funds and which has assets under management of €17bn
“My answer would be to take a very good look at Montesquieu’s trias politica – the separation of the legislative, administrative and judicial powers that he proposed in 1748. And that’s how we could proceed with pension fund governance.
“Pension fund governance is a very important issue right now in the Netherlands and if other countries are following the path to develop a second-pillar scheme in which there is a build up of capital linked to individual rights of employees, then there is a need for the type of governance schemes that we are developing. Integrated asset management and liability management of such huge amounts of capital should be state of the art so that there is no way to allow amateurism on the capital markets.
“On a European scale both countries and companies could profit from the entrance of professional administration and asset management where they are developing additional pension fund schemes. Consequently, there should be no nationalistic concerns in eastern or southern Europe about doing their own pension deals apart from the more professional players. They will benefit from the expertise both in execution and in regulation in those parts of Europe where there is a strongly developed pension business.
“Considering European legislation on labour and labour arrangements, and legislation concerning the free flow of labour and capital in Europe, there should be the possibility of congruent Europe wide administrations able to implement this legislation. We can’t say that there is a free flow of labour in Europe and still accept that legislation on pensions and the administration and the governance of pension funds is only on a national scale.
“So to the question of whether we could have a more general pan-European approach there is a very Dutch answer, which is that to have more resilience to inflation and demographic pressures we could adopt the three-pillar system as we have in the Netherlands and elsewhere, including the PAYG system, industry-wide or company-linked schemes and then the individual savings or additional insurance schemes. Of course, there could be a somewhat different combination of pillars for each country or multinational.
“If you look at the free movement of capital and labour in Europe the different PAYG systems are a nuisance because in one country there will be one type of social security provision and in another there will be another form. So the best way to tackle this problem is to have some standardisation, adopting the same basic scheme in all EU countries and to have general arrangements to facilitate exchange of rights and obligations, preferably on the level of national accounts.”
“However given the demographic situation in Europe the development of second-pillar solution is of first importance.”
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