The Spanish presidency of the European Union is leading a move to persuade the European Council to include quantitative investment rules – the so-called prudent man plus principle – in the proposed pensions directive.
A confidential proposal from the Spanish delegation to the European Council working group on the pensions directive contains sweeping restrictions on the use of derivatives and investment in real estate and private equity
If this is accepted it would represents a huge step back from the position adopted by the European parliament last year, which gave its backing to the prudent man principle and pressed for an end to quantitative investment restrictions within the next five years.
The move is seen as an attempt by some southern European countries, notably Italy, to introduce restrictions that have a discriminate heavily against defined benefit pensions. Not surprisingly, it will be strongly opposed by the Netherlands, UK and Ireland.
An official at the Dutch finance ministry confirmed that the Spanish delegation had drawn up proposals but said that these were confidential. He said they would be discussed at a meeting of the EC working group on the pensions directive on 22 February.
IPE understands that the document contains the following key restrictions:
q investment to be limited to companies in OECD countries;
q investment only in companies listed on stock exchanges, and
q a ban on pension funds maintaining an open position in derivatives.
One investment strategist of a leading European pension fund, who asked not to be named, said the restrictions were effectively a ban on using derivatives at all: “The proposals say you should not have an open position in derivatives, so that when you buy one asset you must sell another The way things are worded it means you can never have an open position if you sell to make a profit you must re-balance immediately. That defeats the whole object of the exercise.”
He said this would also have a dramatic impact on pension funds’ investment in commodities, where derivatives are traded in derivatives rather than the underlying asset. “The investment proposals are supposed to reduce risk but they will increase it,” he said.
The proposed prohibition on investing in unlisted companies will also be damaging, he said. “In a lot of European countries there is hardly any publicly listed real estate. Pension funds would be forced to sell their holdings which would have a severe impact on prices in the real estate market.”
Some observers suggest that, although the proposals are ostensibly the work of the Spanish delegation, they bear the hallmark of the Spanish presidency, which is eager to make a name for itself. They suspect that Spain will use its presidency to attempt to rush through investment supervision proposals.
Chris Verhaegen, permanent representative at the European Federation of Retirement Provision (EFRP) said in Brussels that the proposals were likely to gain considerable support. “There are still a significant number of countries in favour of quantiative supervision. It’s a very sensitive issue and we are really anxious to see what is going to come out of it. We, of course, are not in favour.”
Verhaegen said the proposals did not take account of different countries’ use of defined contribution schemes, where the individual bears the investment risk, and defined benefit schemes. “There are two different situations in Europe, and our view is that this has not been taken into account sufficiently by the Spanish presidency when they launched their proposals,” she said.
However she added that the Spanish presidency’s enthusiasm for pushing ahead rapidly with the pensions directive was a welcome change from the attitude of the preceding Belgian presidency. “They want to make progress at least.”
Setting out its priorities when it took over the EU presidency, the Spanish said “special attention will also be paid to the reports relating to pensions to be presented at the Barcelona European Council” in March.
However, others fear that the Spanish proposals could set back the pensions directive, scheduled for adoption some time this year, by up to 18 months.

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