EUROPE – Occupational pension schemes can play a major role in long-term financing, partially filling the gap left by banks and governments, as long as a number of conditions are met, such as the drop of capital requirements for IORPs and the introduction of tax incentives, pension associations have said.
Responding to the Green Paper on Long-Term Investing, the Dutch Pensions Federation, PensionsEurope and the European Association of Paritarian Institutions (AEIP) all welcomed the European Commission's work.
PensionsEurope agreed that occupational pension funds were "very suitable" long-term investors, due to the match with the long duration and maturities of their liabilities.
However, the association pointed out that the focus should be not only on the stimulation of the supply side of long-term investment but also on the demand side.
It also stressed that banks were the only intermediaries that possessed sufficiently developed credit and monitoring departments, without which it remained "almost impossible" to do a proper selection for extending long-term loans.
"Thus, cooperation and alignment between banks and institutional investors could greatly enhance the possibilities of extending long-term financing to the European economy in a responsible and productive way," it said.
Even if those conditions were met, savings would still need to be generated for pension schemes to have funds available for investment.
"Administrative burdens and regulatory cost loads should be reduced as much as possible," it added.
Another Brussels-based association, the AEIP, echoed those thoughts.
It emphasised that the prudential regime applied to institutional investors should not hinder their ability to invest in long-term asset classes.
According to the AEIP, one way of facilitating the financing of long-term projects by pension schemes would be via tax incentives.
"Tax incentives can be a powerful tool to stimulate long-term savings, either directly or indirectly," it said.
"Particular saving products can, indeed, be tax-exempt or provided with a favourable tax treatment to increase the interests of households in allocating their savings into these products such as long-term bank deposits."
The association said tax incentives could also have an indirect impact on the long-term savings of households – for instance, guaranteeing the favourable fiscal treatment of occupational pension contributions and payments.
The AEIP suggested that a particular incentive for long-term investments be provided by favourable fiscal treatment or even exemption for socially responsible investments or alternative investments such as infrastructure and SME financing.
The Dutch Pensions Federation sought to make a clear distinction between project financing and project implementation as set out in the Green Paper.
"Pension funds are suitable partners for the financing part," it said. "The project implementation part, however, is not the core business of pension funds."
It therefore suggested finding a "suitable partner" looking after the implementation of long-term projects.
"The intrinsic risks of a project could be split between all participating partners, so as to provide the right incentives for each partner to deliver on their respective responsibilities," it said.
The federation also made a number of recommendations on to how make long-term projects more appealing to pension funds.
While the projects will have to present attractive risk/return characteristics, it said, they will also have to offer full transparency on risk.
Additionally, the bidding process for a long-term investment project should not be too long or too costly, it said.