Why the EU pension review is a decisive moment for PE

Last week, the European Commission published a series of proposals designed to improve the EU pension ecosystem. These included changes to the “IORP” Directive, the Directive governing occupational pensions, and to the “PEPP”, the currently very unsuccessful Pan European Pension Product.

At first glance, a review of the occupational pension ecosystem, now to be discussed with Council and European Parliament, should not matter too much, even to EU-based managers. Or it should at least not be the “decisive moment” we cheekily wrote in the title of this column.

Yes, pension funds are (still) the main investors in private equity. But a lot of this capital is actually coming from US managers or from private pension funds (the third pillar) – as opposed to the occupational ones (the second pillar) covered by this legislative review.

Yes, IORP rules matter to determine whether pension funds should be refrained or not to invest in private assets. But the review does not fundamentally change the “prudent person” principle, which for long has encouraged pension funds to commit capital to perceivably safer assets. It still states that most investments should be made in regulated markets, and its previous, currently in-force version already stated that investments in private equity should not be discouraged.

Yes, the review will create a series of important changes for pension funds, from rules on auto-enrollment, supervision, costs and many others. But to the majority of Invest Europe members that are not pension fund LPs*, these changes are clearly not “decisive”.

So what is?

Here is what the European Commission is writing in its side communication:

Although EU households are diligent savers, they save predominantly in liquid assets, such as bank deposits, rather than by investing in long-term financial instruments that would yield higher returns and could better support innovation, industrial adjustment and the diffusion of new technologies.

This, for all intent and purposes, is new. This is the first time the European Commission recognises, in a legislation designed to regulate and protect a major institutional investor, that a “safe investment” is not necessarily a listed share or a bond. If EU lawmakers have long been aware of the benefits of private equity and venture capital, they have never went as far as saying that there is nothing prudent in being safe.

As such, the review launched last week by the European Commission marks an important step towards a recognition that long-term private assets are not as relevant - but perhaps more relevant to EU’s stability than traditional assets. Irrespective of the long negotiations that will soon start, this is what is fundamental with last week’s publication: the groundbreaking recognition that private equity is no longer the new kid on the block, but one of the main channels to achieve EU growth.

If there is still a lot to be done, including at national level, to transform this cultural change into a political reality, European private equity managers should see this as a sign they are now, more than ever, a central part of the story.

*If you are, let us know. Maybe we can help when advocating for industry in upcoming negotiations!