Pension funds join battle over EU hedge fund rules
By Joel Dimmock
LONDON, Aug 4 (Reuters) – British pension funds have begun exerting pressure to change proposed European Union rules that would impose new regulations on the hedge fund and alternative investment sector.
The National Association of Pension Funds (NAPF) and a director at Hermes, manager of Britain’s largest corporate scheme, told Reuters the rules could damage investment choice and hit returns, affecting the affordability of pensions.
Their comments came as the Alternative Investment Management Association (AIMA) focused its lobbying efforts on the effect the European Union rules might have on retirement savings.
The draft legislation affects hedge funds, private equity funds and real estate products and demands that funds register and disclose information to regulators such as levels of leverage. The directive, announced in April, also restricts the ability of non-EU managers to sell funds in Europe.
Kathryn Graham, a director at Hermes Pension Fund Management, which acts as direct advisers to trustees of the more than 30 billion pound ($50.8 billion) BT Pension Scheme, said it was time for the industry to speak up.
“There are unintended consequences from the structure of the directive which would lead us to have substantially smaller choice in terms of the investments we’re able to make, but also, I would imagine, a significantly increased cost to the investments we are able to make,” she told Reuters.
“This legislation really casts some doubt … on how we’d be able to invest in those investments going forward. We will make sure that our voice is heard.”
Pension funds have increased allocations to asset classes outside bonds and equities as they seek to diversify portfolios and boost returns to meet the demands of ageing populations.
“The directive, if passed in its current form, will reduce investment choice and mean that the return pension schemes can get for any level of risk will be reduced,” Joanne Segars, NAPF chief executive, told Reuters in an emailed statement.
“Even a small reduction in return will have an impact on the affordability of defined benefit pension schemes,” she said.
Representatives of the fund sectors affected by the draft rules have been lobbying hard to soften the final stance taken by the EU. They believe the directive was influenced by political grandstanding and did not take a measured look at their industries’ roles in the financial crisis.
Their efforts, and sustained pressure from British government and U.S. Treasury officials, have led many observers to predict changes before the rules become law.
AIMA said on Tuesday that the EU legislation could deliver a 25 billion euro ($35.6 billion) hit to the European pension fund industry if passed in its current form.
“This (25 billion euros) is an estimated figure, but it shows the potentially enormous impact that the directive could have on Europe’s pension funds and, in the longer term, Europe’s pensioners,” said Andrew Baker, chief executive of AIMA.
AIMA used an estimate that the aggregate exposure to hedge funds, private equity funds and property funds equates to 20 percent of all pension money in Europe.
It also estimates that changes envisaged by the new legislation would shave 2.5 percent off pension funds’ returns through reduced choice, switches to other asset classes, or by reduced returns from alternative investments due to extra compliance and leverage demands.