Dear Commissioner Lord Hill, members of the European Parliament, and other participants,

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1 Inleiding voor Long Term Investment Intergroup (Europees Parlement) Institutional Investors and the Real Economy Dear Commissioner Lord Hill, members of the European Parliament, and other participants, Thank you for this opportunity to exchange views on long term investing and the real economy. I would like to thank the organisers of this meeting for inviting Pensions Europe that I represent here today. Collectively, our members hold approximately 3.2 trillion in assets, or roughly 20% of aggregate EU GDP. The availability and destination of long term capital affects economic growth within Europe, as well as the functioning of financial markets. Pension funds bring a long-term mind set to capital markets which, I would argue, is a valuable and still too scarce resource. With their very long-term liabilities pension funds are by design well placed to take on liquidity risk and to invest in a counter-cyclical manner. This allows for maintaining well diversified portfolios, also in times of market stress. Pension funds have more scope than others to invest in private markets and may therefore help over time to bridge the large gap in European infrastructure and venture capital investment. Pension funds also have the ability to counter corporate shortism

2 as engaged shareholders. Leaders in the field create socio-economic value as they engage with companies on environmental, social and governance practices and stay engaged over time. Today pension funds face a number of forces that may make it more difficult to focus on the long term. Trust has been undermined in the financial sector due to the long shadow cast by the global financial crisis. This has also lowered trust in pension funds. Low and negative real interest rates on government bonds make it more difficult to generate the required returns for pensions that rise in line with inflation. If this very low interest rate environment persists, pensions will become less affordable and also less certain over time. Tensions are also emerging between the ability of pension funds to commit long-term capital to illiquid asset classes such as infrastructure with the increasing liquidity demands they face in other areas of the investment portfolio. In particular, the EMIR regulation and the increasing share of central clearing of derivatives potentially leads to costly restrictions on the asset and liability management of pension funds. As Europe is awash in liquidity, paradoxically perhaps, certain areas that are crucial for the future of Europe such as investing in new clean technologies, digital highways, energy efficient buildings and renewable energy generation suffer from significant

3 underinvestment. The main obstacle here probably does not arise from a lack of long-term capital. From the perspective of pension funds, there is a too limited pipeline of suitable investment opportunities. Also investments may be too small and risky in the development phase, undermining the investment thesis from a cost and complexity perspective. I would like to use this opportunity to make the case for true partnerships between the public and private sector. By joining forces, we can accelerate the pipeline of viable infrastructure projects across a range of areas that may support the real economy. Investors can provide much-needed financial resources, and the public sector can remove obstacles. This requires a willingness to share data and long-term objectives, and discuss bottlenecks, among other things. In this all we must also recognise that there is a diversity of pension schemes across and within member states. Some pension organisations, such as PGGM where I work, have in-house teams that can invest in infrastructure, private equity and other illiquid asset classes through multiple channels also directly. Smaller pension funds rely mostly on external fund managers. The diversity in the European pension fund world therefore calls for tailor-made and pragmatic responses.

4 In this regard, the proposals by the European Commission hold promise in the near term and in the longer term. The European Fund for Strategic Investments (EFSI) can remove obstacles because coinvestments by the public and private sector create alignment of interest. Political risks that often hamper long-term investments can be reduced, especially in heavily regulated markets like infrastructure. In the longer term, the proposals for a capital markets union should make Europe a more attractive destination for investors from within and outside Europe. In addition to EFSI, new institutional arrangement may be considered to help bundle projects, share knowledge and to support feasibility studies with public funds, particularly in the area of green infrastructure. Here the EU may also learn from successful arrangements already in place at national levels that serve as a catalyst for long-term investment in new areas. To summarise. Pension funds are experiencing increasing tensions between their inherent long-term investment horizon, historically low interest rates and increasing liquidity demands related to changes in market structure and regulation. These changing dynamics warrant a closer look at which policies at the European level can strengthen the ability of pension funds to maintain their long-term focus amid these challenging circumstances.

5 Pension funds are natural partners for long-term and strategic investments in the European economy. It is now time to take the next step. We must move from public private partnerships to public private responsibility, in which we define common goals, work together, and share risks as well as returns. The time to act on these issues is now. I look forward to a fruitful discussion and long-term partnership.