The Capital Markets Union and pension capital
The Capital Markets Union plan (CMU) which is proposed by the European Commission aims to create deeper and more integrated capital markets in the European Union. In a well developed CMU pension funds investing in EU countries should encounter fewer barriers and find more opportunities.
More than half the pension capital that PGGM manages for PFZW (pension fund for the Dutch healthcare sector) is invested in Europe. These investments include sovereign bonds, equities, corporate bonds as well as private markets investments such as infrastructure, private equity, private real estate and risk sharing transactions. Private markets investments are generally long-term investments, which make them ideally suitable for pension funds. That is illustrated in this paper.
Five points about the Capital Markets Union
Frank van Lennep, CIO Private Markets at PGGM, has the following recommendations for the European Commission:
- Be ambitious when it comes to removing barriers to cross-border investments. A good example is the practice of withholding tax, which pension funds often have to pay despite being exempted. This will usually be followed by an expensive and time-consuming procedure to reclaim the tax that has been paid. Agreements at EU level should make an end to this practice.
- Increase the investment opportunities in the EU. So-called ‘risk sharing’ transactions between investors and banks are providing banks the necessary room to provide new loans, for example to SMEs. An appropriate regulatory framework for Simple and Transparant Securitisation transactions will enhance this. PGGM has previously written about this topic.
- Acknowledge the differences within Europe. Savings are an important source of retirement income. In the Netherlands we do this collectively (scale) and for the long-term. This offers the advantage of providing capital for investment in private markets. While we believe that occupational pension schemes (second pillar) are a national responsibility, this does not mean we cannot learn from one another in Europe.
The European Commission additionally intends to propose a framework for a European personal pension product in the third pillar. This may have added value for some countries, as a supplement to existing arrangements. In all cases, a European product ought to be a true pension product; meant to provide retirement income with good protection for participants.
- Financial market regulation has a big impact. Pension funds are specifically affected by regulations on the use of derivatives. In the future funds will have to hold large amounts of cash collateral, which will eat into the return for participants. PGGM has previously written about this topic.
- Be ambitious in terms of ‘sustainable finance’. Parties such as PGGM are increasingly including sustainability considerations in their investment decisions, while recognising the overriding importance of balancing risk and return at all times. The European Commission can help in this regard. By ensuring CO2 emissions are correctly priced, for example.
The further development and alignment of EU capital markets is a long-term process that will take shape step by step. The European Commission is heading in the right direction to achieve this aim, and PGGM is pleased to make a practical contribution to the Capital Markets Union.
The UK’s impending exit from the EU presents an enormous challenge. London is the largest capital market in the EU, and also the financial hub and gateway to the continent. The EU must prepare for Brexit and its implications for capital markets. The prospect of Brexit means that progressing the development of EU capital markets has become only more important.
Read here the joint paper by PGGM and PFZW on the Capital Markets Union