EU proposals jeopardise PE investment

Radical proposals put forward by the Spanish delegation at the European Union could force a reduction in PE investments by pension funds.

The European Union is considering reforms to pension fund regulations that could reduce the amount of money invested by pension funds in unlisted investments.

The Spanish proposals, based on the 'prudent person principle', the mainstay of investment policy in the US and UK, would encourage managers to make investments in all asset classes so long as they hold a diversified portfolio and manage it prudently. In addition, it is proposed that there would be a cap on investments in alternative investments in order to lower exposure to an unregulated sector. Such reforms would reassure a number of EU countries that wish to see greater protection for investors and pensioners.

According to John Mackie, chief executive of the British Venture Capital Association, the proposals could jeopardise the enterprise economy currently being promoted by the EU. “These proposals come at a time when we are looking to continue the increase in alternative investments in Europe. They would send Europe in completely the opposite direction of trying to further the enterprise economy.”

In November 2001, European Commissioner Erkki Liikanen called for European pension funds to boost investment in the sector. Speaking at the 6th European Investment Forum in Brussels last year, he said: 'During such challenging times as the present, we must cut down on the red tape for entrepreneurs and we must help them focus on the long term.'

The Spanish plans to stop short of calling for quantitative restrictions on investment in equities. UK managers had feared that the EU might look to limit the proportion of equities in pension fund portfolios to 50 per cent – lower than the typical 70 per cent invested by UK funds.

The proposals are being supported by countries anxious to protect investors and pensioners from speculative investments. Opponents of the reforms include the UK and Dutch governments, which may be supported by Sweden and the Republic of Ireland. These countries would like to see minimal regulation of pension funds' investments in equities. However, the EU qualified majority rules mean that a simple majority could see the Spanish compromise proposals brought into law, although the proposals are currently at a very early stage.

Kerrin Rosenberg, partner at investment consultants Bacon & Woodrow, believes that managers need not worry about the latest proposals- for the time being at least. 'Given the slow-moving nature of the European Commission, I am not overly preoccupied by the latest proposal announcement, although that is not to say that it should be ignored.'