Europe and pensions – where things are headed in the next three years

UCITS – investment funds like open-ended investment collectives and unit trusts – are the golden children of EU policymakers. These products already have a mature system of regulation across Europe, and are at the heart of a thriving cross-border market.

As one European regulator put it: “UCITS is one of the most successful financial and regulatory innovations…. The idea of giving a European passport to a (highly regulated) financial product was brilliant.”

Products like insurance funds are less favoured children. They have more complex legal and tax structures, based in history and custom rather than EU legislation. However, the EU has created a sophisticated system of regulation for these products, and is adding to it all the time.

And then there are pensions, which sit at the back of the classroom and are the most difficult to deal with. Not only is there a vast array of different pensions across Europe, but they are also bound up in a dense mass of tax, employment and welfare law.

Pension legislation is carefully guarded by vested interests, and progress always lags a long way behind any other kind of financial arrangement.

Take regulation of the solvency of occupational pension funds, for example. The EU authorities passed a first, tentative piece of legislation on occupational pensions in 2003, with the Institutions for Occupational Retirement Provision Directive.

Since then, some EU policymakers have tried to introduce the kind of requirements that exist to ensure the solvency of insurance companies to occupational pension schemes, with very little success.

A current revision of the IORP directive is going through the legislative process, but opposition from unions, employers and powerful member states has ensured that it will contain hardly any new prudential measures.

Keep it simple

However, there is a better prospect for EU regulation around communications to scheme members and customers.

The EU set down standards for regular information for UCITS customers in 2007, and in 2009 set out rules for a short, precontractual key investor information document. In 2017, a similar document to the KIID will be rolled out for insurance-based investments, which will be called a key information document.

There was an attempt to include pensions in this rollout as well, but it was defeated just before the regulations were passed.

Even if the UK decides to leave the EU later this year, it will probably have to commit to adopting similar financial services regulations

Instead, occupational pension funds will be required to give out standardised annual statements when the revised IORP directive comes into force, possibly in 2018.

In the same year, the EU will launch a review of KIDs and ask again whether they should apply to pensions – it seems likely that this time around, they will.

The Financial Conduct Authority has also said it will look at introducing some EU legislation to pension products before the EU authorities act, in order to preserve a level playing field between pension and investment products.

So it is clear that any new regulation for pensions in the EU will be slow in coming.

However, some EU regulation is on the way – even if the UK decides to leave the EU later this year, it will probably have to commit to adopting similar financial services regulations to the EU as part of the process of renegotiating trade deals.

And we can get a pretty good idea of what kind of regulated information pension schemes will be giving to members and customers, just by looking at what the fund managers have to provide today.

Matthew Connell is head of regulatory developments at Zurich UK Life