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Well here we are. Thursday 23rd June. A day which many of us have been waiting for for a long time. A historic day for Europe. A possible turning point. The Pensions Europe Conference 2016.
Later today I will be in the UK voting in the referendum. But this morning I'm glad to be here talking about the work we're doing to deepen the single market, to build a Capital Markets Union, and to support a strong pensions market in Europe. On the day Britain goes to the polls to vote on its membership of the EU - a decision that carries such long term implications for Britain's relationship with its European friends and its place in the world - it seems right to be talking to people whose business it is to weigh risk against return, to assess the facts, and to take evidence based investment decisions designed to withstand the test of time.
Yours is an industry that has a special responsibility because people depend on you to help them save and plan for their old age. And it's a responsibility that will only grow in the years ahead. People are living longer; they're having fewer children. Life expectancy is expected to continue increasing. The ratio of retired people to workers is set to double in the next thirty five years. Public finances are going to remain under pressure.
All of this has implications for our economies. Of course, not all of the answers can lie with pensions themselves. Older retirement ages are going to have to be part of the solution – and reforms have been introduced in a number of European countries. But it’s clear that to address the problem, we are going to need occupational and personal pension schemes to take up more of the slack.
At the moment, only about 40% of the EU's workforce has the opportunity to pay into a work-based pension. And that is concentrated in just a few member states like the Netherlands, Denmark, Sweden, Finland, Ireland, the UK. In many countries, occupational pensions are still not an option for most of the workforce. Personal pensions are more widely available but relatively few people are interested in investing in them.
Policies to ensure people save enough for their old age are of course the responsibility of national governments. But at a European level, as well as supporting the sharing of best practice, there’s a sense that more could be done to create the right environment for pension funds to prosper and to deliver higher returns for those who invest in them.
That is part of what drives me forward in my work to build deeper capital markets in Europe. I'm also clear that fewer barriers to the provision of pension services across borders would increase competition between pension providers, enable services to be sold into bigger markets and create economies of scale that should benefit investors.
It’s clear that institutional investors of your size, that manage the workplace pensions of some 80 million European citizens and some 3.5 trillion euros worth of assets, have a huge contribution to make. Who is better placed than you to support the long term investment projects that are essential for our competitiveness?
The contribution you make to our economy, to our society, is one we should celebrate, and my job is to support you in that, not get in the way. This sustained period of low interest rates we’re going through is obviously putting significant pressure on occupational pension schemes - particularly defined benefit schemes - by lowering the investment returns. And I know that adjusting to the new regulatory framework that has flowed from the financial crisis is an added challenge that takes resource and energy. But if getting the response right lies largely in your hands, I’m clear on two things. First, like the rest of the financial sector, once legislation linked to the crisis is completed, a period of legislative calm is needed so that businesses can concentrate on managing their clients' investments. Second, I’ll continue to work to improve the broader investment environment.
This is what lies at the heart of our project to build deeper capital markets, the Capital Markets Union. Here I have tried to combine early momentum with longer term work to knock down barriers to the free flow of capital. Let me give you just a few examples of the work underway.
In the coming days I'll be proposing amendments to EU legislation to build up venture capital markets, and my colleague Carlos Moedas is looking at how to use public money to attract private investment through a pan European fund-of-funds. To free up banking lending and support investment in the wider economy, we’ve already tabled a proposal to restart Europe’s securitisation markets by defining Simple, Transparent and Standardised securitisation and lowering capital requirements that are associated with them. To make it easier for companies to raise money on public markets we've made proposals to create a Prospectus regime that's simpler, faster and cheaper. And we've amended Solvency II to define infrastructure as an asset class and reduced capital ratios for this type of investment by about a third. That change came into effect on 2nd April and will support investment in European infrastructure.
To dismantle barriers to investment funds operating across borders, we've launched a consultation to get a better idea of the barriers that stand in the way of services being offered in different countries, so that we can work to overcome them. And before the end of the year, we'll bring forward proposals aimed at reducing differences between national insolvency regimes, building on national regimes that work well. The goal will be to try to make company restructuring easier, and to increase certainty for those wanting to invest across European borders.
As part of the CMU Action Plan, we also said that we would look at the financial services legislation that we have passed to make sure it is working as intended. There's no dispute that the rules passed have overall made our financial sector stronger and more resilient. But there is also agreement that it makes sense to check that they are working as we hoped and are as growth friendly as possible.
Respondents to our Call for Evidence have said that overall the measures put in place following the crisis are working well, but that in places our legislation is not proportionate enough; that it could be weighing down the amount of financing available to the wider economy; and that the compliance burden is too heavy. We'll continue working through the evidence and come forward with our thinking before the summer break.
I know that Pension Funds have called for a permanent exemption from some of EMIR's rules on central clearing. I understand your concern. That's why last year we extended the temporary exemption and that's why we'll be feeding all the evidence you've provided into the EMIR review that's drawing to a close.
Across all sectors, our Call for Evidence has shown we must be cautious around further reforms that might have an impact on market liquidity. That's the approach I'll be taking to implementing measures flowing out of Basel on issues like NSFR and the Trading Book Review. And I want to use the CRR review to make our rules more proportionate. For all our rules - where there's evidence that the same prudential objectives can be achieved in a more growth friendly way, I am keen to see how we can do it.
Directly relevant to the pensions industry is the work we're taking forward with Member States to see whether we can make cross border investments easier by simplifying the system to reclaim tax when investments are subject to double taxation.
At the moment, many cross border investments are penalised by double taxation on dividend income, interest payment and capital gains. I know the process for reclaiming these withheld taxes can be complicated and off-putting. The cost of reimbursements foregone, the administrative burden of reclaiming tax and the opportunity costs linked to delayed repayments has been estimated at over 8 billion euros a year across the EU.
We want to make the whole process simpler. So we're working with national governments – who are in charge of this issue - to see whether we can develop a code of conduct for more efficient withholding tax procedures. Our goal is for tax relief to be applied immediately where appropriate so that we can avoid complicated refund processes. And when refund procedures can't be avoided, to make the process straightforward and quick, with standardised application procedures available online.
We're also looking at what can be done to support cross border provision of personal pension products so that consumers can benefit from a wider range of products, competing across borders. Before the summer break, we'll be launching a consultation and we've already launched a feasibility study to map the existing market.
We'll use this consultation to ask for pension professionals' views, gauge the level of interest, and to determine whether action at EU level could be helpful. But I also want to hear from European citizens about their experience of existing private pension schemes. The consultation will run for three months. We'll hold a public hearing in October to discuss responses, consider practical suggestions to overcome barriers, and give pension providers the opportunity to explain their products.
The feasibility study is being taken forward in parallel. I don’t want to disrupt markets that work well. So we need to build a clearer picture of the different types of tax incentives used across Europe to encourage people to take out personal pensions, as well as how they interact with social and labour laws. We expect that initial analysis to be ready by the end of this year.
I'm pleased that Pensions Europe has supported our work in this area which aims to increase consumer choice, and help complement other pensions when people retire. I understand your desire for the scope of any possible pan-European personal pension product to be clearly defined, and for a clear distinction to be made with workplace pensions. I want to proceed with caution, and keep the focus on increasing the options for Europeans who want to plan ahead and save wherever they are in the EU.
With more immediate implications for your businesses, work has continued to strengthen governance and transparency, and improve the cross border provision of occupational pensions in Europe. The pace of discussions to revise the Institutions for Occupational Pensions Directive, IORP2, has recently picked up. We should get a final agreement soon and I'm very grateful for the hard work of Brian Hayes in the European Parliament.
Why is this necessary? Well, as we work to encourage occupational pensions to take on a greater role, it's important we take measures to increase transparency so that those who invest in these pensions are clear on the risks they're taking, and how their investment is performing over time.
To ensure high standards of governance throughout the industry, we want to make sure the right level of risk assessment is consistently undertaken before investments are made and that records are kept of these assessments. We're also keen to ensure that certain key functions in occupational pension funds – like internal auditors, risk managers and in some cases actuaries - are filled by professionals.
To increase transparency, IORP2 will introduce summary documents providing key information about the risks and potential returns attached to certain pensions, and the requirement for pension holders to receive regular, understandable Pension Benefit Statements detailing how investments are progressing. I know the majority of you do this already and we want to build on this good practice.
The IORP2 proposal should clarify the rules and simplify the procedures for IORPs to operate across borders. It would make cross border transfers between IORPs in different countries possible and improve the coordination of oversight and supervision between different jurisdictions. This is particularly important for multinationals to get the best possible return for their occupational pension holders in different countries, but should also help SMEs that want to grow into bigger markets and offer their staff occupational pensions.
The scope of the legislation will be kept proportionate. Exemptions will be able to be granted for smaller IORPs that would, for example, only have to comply with minimum requirements for the safekeeping of assets. And once this legislation is agreed, that will be it. We don't have any more changes up our sleeve. There are no plans to harmonise solvency rules for occupational pensions and there are no plans to introduce a standardised risk assessment process.
IOPR2 will modernise the framework for the regulation of occupational pensions across the EU. It will protect consumers by improving governance and transparency, and encourage economies of scale in bigger markets. And if the Dutch Presidency is successful the legislation would come into force by the end of the year and would be applied by the end of 2018.
That's just some of the work we're taking forward to improve the environment for the pensions industry in Europe, to deepen capital markets, to support pension funds' capacity to invest for the long term, and to deliver a better service to their members and beneficiaries. There's a great deal of appetite in our work to take the single market a step further and to build trust in Europe's financial sector. We've got off to a good start. Now, with your help, I want to keep up the momentum, to respond to the huge demographic challenge Europe faces, and to strengthen Europe's financial services sector with the pensions industry at its heart.
