Brussels is seeking to defuse a regulatory time-bomb facing Europe’s pensions as the retirement industry warns that EU derivatives reforms scheduled for 2018 could cost savers billions.
The European Commission is preparing legislation to amend regulations that are seen hurting pensions funds by forcing them to put aside higher amounts of money to satisfy derivatives rules.
Trades such as swaps and other derivatives require support in the form or margin from users such as pension funds. The need for extra cash for such trades is seen straining occupational pension funds, because they do not have the ready supply of money or other highly liquid assets to meet such rules.
Without relief, the cumulative impact could be big enough to wipe €3bn off EU pensioners’ retirement income every year and has been strongly resisted by pension funds such as APG, PGGM and MN of the Netherlands and the UK’s Insight Investment, which collectively have €1.2tn assets under management.
The extent to which different countries rely on occupational pension funds to finance people’s retirement needs varies wildly across the EU. For the countries most affected, such as the UK and the Netherlands, the impact to pension funds of applying the rules could lead to a long-term drop in retirement income of 3.1 per cent in the Netherlands and 2.3 per cent in the UK, according to EU estimates.
And there are mounting concerns within the commission that its planned solution is being bogged down as some governments, notably France, try to widen the scope of the changes to derivatives rules to include financial regulation for overseas clearing houses.
Those private arguments could cost precious time for the commission, which has until March to present its targeted changes to the 2012 European Market Infrastructure Regulation, that requires more trading in over-the-counter swaps to pass through market utilities known as clearing houses.
France is among a number of countries to have identified the amendments as a potential vehicle to address concerns about the potential systemic risks posed by mergers between clearing houses.
The country is also pushing for the European Securities and Markets Authority, an EU watchdog, to be given more oversight of clearing houses that are active in the EU but based outside it.
According to people with direct knowledge of the discussions, an official from the French central bank even suggested at a technical meeting in November that the new law could help hand the European Central Bank long-sought-after powers to force clearing of euro-denominated securities to take place within the eurozone.
Brussels has repeatedly delayed the application of the rules to pension funds because of concerns about the financial consequences. The current deadline for the rules to kick in is August 16 2018 and the commission cannot extend it any further.
A commission official confirmed that Brussels is planning to propose “targeted amendments” to the current Emir law in mid-March. The commission is “assessing various options on pension funds”, the official said. One option is to change the law to allow another lengthy exemption, according to sources.
The industry remains hopeful of a solution. “The signals from the European Commission are increasingly helpful, they now understand the problems pension funds face,” said James Walsh, policy leader, EU and international, at the UK’s Pension and Lifetime Savings Association. “We expect something within the Emir review. Possibly they will make the exemption permanent.’’