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07 March 2014

EBF/PensionsEurope comment on EBA final draft RTS on own funds

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In a letter to the Commission, EBF/PensionsEurope highlighted the problem for European pension funds sponsored by banks with Article 15(a) of the draft RTS. DC pension funds should not affect the regulatory capital of the sponsoring banking institution.

Reference to pension funds in Article 15(a)(2)(b)(i)

The inclusion of pension funds amongst the entities referred to in Article 15(a)(2)(b)(i) is deemed to be a mistake. It would otherwise render Article 15(a)(2)(b)(ii) completely superfluous, and will also not be meeting the apparent policy objective behind the regulation.

Indeed, if all pension funds are caught by the first limb of paragraph (b), then the carve-out for certain “independent” Defined Benefit (DB) pension funds found in the limb (ii) of paragraph (b) could never be relied upon. Furthermore, in the case of Defined Contribution (DC) pension funds sponsored by banks, the risks are borne by the beneficiaries and not by the sponsoring entity (the bank). Hence, there is no reason why DC pension funds should affect the regulatory capital of banks. In this regard it is also uncertain the treatment that shall be given to those pension funds that manages both a DB and a DC pension plan.

Excessively restrictive definition of independent DB pension fund in Article 15(a)(3)

Notwithstanding the problem outlined above, the requirements set out in Article 15(a)(3) of the final draft regulatory standards to qualify for the exemption for independent DB pension funds of Article 15(a)(2)(b)(ii) are excessively restrictive. These requirements are not aligned with the ones set out in the Directive on Institutions for Occupational Retirement Provision (IORP Directive). As a result in some EU Member States a majority of DB pension funds will not meet these requirements and therefore they will not be able to profit from an exemption which is specifically designed for them.

The IORP Directive mandates a legal separation between the pension fund and the sponsoring institution. It also requires pension funds to invest following the prudent person rule and in the best interest of members and beneficiaries. Moreover, the IORP Directive also establishes strict investment restrictions of the pension fund in its sponsoring institution. PensionsEurope believes that these requirements, among others included in the IORP Directive ensure the independence between the pension fund and its sponsoring institution.

However, Article 15(a)(3) of the final draft regulatory technical standards goes beyond these requirements and makes a reference to an “independent governance” structure, which, despite the requirements established in the IORP Directive mentioned above these lines, could rise legal uncertainty in those EU Member States were a majority of the members of the Board of Directors of a pension fund are appointed by its sponsoring institution or Group companies. Moreover, contrary to the EBA final draft regulatory technical standards, the IORP Directive also does not explicitly mandate that the constitutional documentation of a pension fund needs to be approved by an independent regulator or shall be established by the national law.

Given the above PensionsEurope considers that the EBA final draft regulatory technical standards on own funds should be modified by:

  • Deleting the words "pension funds" in Article 15(a)(2)(b)(i), making like this clear that DC pension funds are out of scope as Article 15(a)(2)(b)(ii) is already dealing with DB pensions funds.
  • The treatment given to pension funds managing both a DB and a DC pension fund should be clarified. DC pension funds should not affect the regulatory capital of the banking institution which sponsors it.

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