Keynote Speech at European Pensions Funds Congress

Speech delivered on Wed 2nd Dec 2009

Thank you for inviting me. I am pleased to be here even if Chris Verhaegen had to pursue me all round the Eurofi conference in Gothenburg in order to catch up with me. Persistence is rewarded and I hope I can live up to it.

A year ago when I did the opening speech here in Frankfurt at the CEIOPS conference we were still embroiled in Solvency 2. The Parliament then still hoped to rescue the Group Support regime, but we could not in the end. But it did take us a long way down the path of understanding cross-border resolution regimes. The living wills mooted for banks have a lot in common with our attempts to define an equitable resolution over time, and so I am optimistic that this will assist a return to Group Support in a while.

Anyway, so now we have Solvency 2 and that has amended the IORP directive so that IORP now stands alone. IORP is also still talked about for updating. In doing this we should take care: one the one hand we do want pension funds to benefit from the advantages of the structures set up under Solvency 2, but on the other hand looking at what is being thrown up by way of solvency capital in the implementing measures it is perfectly understandable if you said you would rather pass on that one right now! Pension funds have had financial storms to withstand and we have to take care with regulatory changes.

Next door I have just been speaking about having a regulatory stability and growth pact - as I am sure you will detect I have borrowed the name from the macroeconomic pact. I chose it because it epitomises the balance that has to be made - stability and soundness but not to the point of intolerable stifling of growth.

My point is that I want a regulatory stability and growth pact to accompany the ad hoc FSAP 2 or financial stability action plan that is enveloping us. This regulatory stability and growth pact should apply not just to the making of new laws, but also to their implementation and application by supervisors.

Now, talking about regulation I should mention the AIFM directive and I know that this is causing alarm in many quarters. We heard from one pension fund at a hearing in the Parliament on 10 November that it could mean a much reduced yield corresponding to a requirement to raise premiums by 10%. This prompts me to repeat the comment I made at last years CEIOPS conference with regard to insurance - there is nothing so risky for the consumer as not being able to afford the insurance. The same is true of pensions.

We know the problems, it has been encapsulated in the phrase that the Commission's proposal creates both prison and fortress Europe with investments unable to get out or come in.

And of course it is all intertwined.

The Parliament has had two exchanges of views and a day of Hearing and seminar at which there were speakers from two pension funds along with other industries and academics. It will come as no surprise that there was a universal agreement that a lot of changes were needed.

One of the points that I have been most interested in from the start is the matter of depository liability and I will say a few words about this because it is obviously also relevant to UCITS.

I remember when I was negotiating the payments services directive, I fought very hard to try and tie banks into end to end liability. I thought that it was reasonable that they - in a more empowered position - should take responsibility for their associates in foreign countries. What hope did an individual have in checking out a bank in another country? I failed to get what I wanted with regard to end to end liability in third countries.

That is another story but turning to depositories, I can see the same argument and superficially it is attractive. However, if we examine it more closely it starts to fall apart.

If a security has by law to be held in a depository in a third country, then there is no alternative. Some third countries will be safer than others. The relative safety of the country will be priced in to the return on the security - so if there is a risk, for example that there will be government seizure, that is priced in. Or at least it is in most cases - last time I mentioned countries and seizure someone said "you mean like the UK"!

So if the risk has been priced in the return, and the main depository has done reasonable checks, what is the effect of an absolute main depository liability?

First, there is the need for insurance. This might be difficult but could be bought at a price. That price would be passed on to investors. In extreme circumstances there might be questions about who is big enough to insure and does this increase systemic risk.

But the pricing would be a general one in all probability, so it could lead to the situation that those receiving the high return for investing in risky countries are underwritten by everyone, including those not getting the high return, which is clearly unfair. Or the effect could be to deter investment in some third countries, and certainly this could have implications for development as well as investment returns.

So at the moment I think that an absolute liability for depositories may not be helpful and that a due diligence regime is a better solution. Such a regime would have yielded the same result in the event of choice of a bad depository as in the Madoff case.

Then we have restrictions on private placement to consider. Again how are pension funds going to be able to invest if access to these is to be restricted? I am sure that many of you will have heard that the solution being mooted in the Swedish Presidency proposal is to maintain an EU only regime that benefits from a passport, but to reintroduce national private placement regimes. This is to my mind not a happy compromise at a time when we are attempting to build a new supervisory architecture that above all should be looking to enhance the single market. But of course it is better than being barred from the investment altogether.

And rather than saying there will be a three year 'shut out' from passporting of non-EU funds even when there is equivalence, if we have to impose a three year protectionist regime, we should at the very least be saying there is a maximum of three years for the new supervisory authorities to get a grip after which the presumption is there should be automatic EU wide trust of another Member State's supervisors.

These are just a couple of many problems and it is imperative we get the AIFM right for the end user's sake. We want the balance of stability and growth.

There is a very scary situation here for the people who will have to retire before their investments have had time to recover and it is imperative that we do not compound their problem through unwarranted restrictions on investments at the professional level.

So I have a lot of sympathy for the reasoned presentations, in particular from the pensions industry, concerning the AIFM directive and I hope that we can find the solutions.

I will turn now to a subject that I was asked recently in London. How can the financial industry regain respect?

I told the banks that there is only one answer to that - accept that they are part of ordinary life. That their directors, analysts, traders are not cleverer, better or harder working than everyone else. Even if their bank did not need rescuing, right now they are making profit on the back of low interest rates, the real cost of which is borne by everyone and sensed by everyone. Not until banks can show they "get it", that they are servants not masters of the universe, will they gain respect.

Now, pension funds - and your cousins in insurance - are not seen as the glamour and glitterati of finance. But in the current economic climate, maybe there should be more attention and awareness of your role.

All too often the only time we read about pension funds is when there is bad news concerning deficits. Well, that is a problem shared due to market circumstances. But the essence of pension funds, of safety, stability and long term investment is the mood of the moment.

With the demographic changes that are taking place in Europe, the role of pension funds is set to increase in importance. You are huge institutional investors. You are hugely important to the financing of the real economy as well as to your ultimate purpose of providing pensions.

Who is it that the Parliament has turned to when it wants some 'honest broker' advice about the effects of the AIFM Directive on ordinary people?

Who is it playing a large part in the recovery of the stock markets - and hopefully setting themselves on a good road to recovery too?

Who could be the drivers of the new morality in finance that we seek simply by using their institutional power?

It is you.

It is you who could be the masters of the masters of the universe.

So get on with it. Be awkward. Tell them how they must behave.

Be the heroes of the universe.

You have the people's money and the people are counting on you.