(July 1, 2013) — A reason to be cheerful: legislation on Solvency II for pensions will never be passed because there are too many levels of sign off needed to get the move approved, according to JP Morgan Asset Management’s Paul Sweeting and Alexandre Christie.
Published on the day the European Union welcomes Croatia into the fold, IORP II Lite – the end of Solvency II for pensions? analyses the processes that would have to be fulfilled for the Solvency directive to be put back on the agenda for pension funds, and declares there are simply too many of them to realistically see such a directive pass.
Earlier this year, Michel Barnier, the commissioner for internal market and services in the European Commission, said that the first pillar of the proposed IORP directive would not be implemented, and that instead, he would present a proposal in the autumn that confines itself to the areas of governance, transparency and reporting requirements–what JP Morgan Asset Management calls IORP II Lite.
Commissioner Barnier did say he hoped to ultimately address the issue of solvency rules once “more complete data” was available, but Sweeting and Christie are sceptical that a revised first pillar would come to pass, as the countries already opposing it (Germany, the UK, the Netherlands, Belgium, and Ireland) only need the support of one additional country, no matter how small, to achieve a blocking minority in the Council of the European Union.
Here’s how the complicated voting structure for technical directives, such as IORP II, works: the directives are presented for voting to three different groups simultaneously. These are the national parliaments of member states, the European Parliament, and the European Council of Ministers.
At the national parliament stage, if 10 of the 28 states object, the directive is given a yellow card, which slows down the implementation and forces the European Council to analyse the proposals again.
If 15 of the states reject the directive, this upgrades to an orange card. The directive is then referred to the European Parliament and Council. Either body can then throw out the legislation, subject to a 55% council majority or a simple majority vote in the European Parliament.
Still with us? Good. If the directive survives this national member state stage, it also needs to survive the European Parliament. A majority vote is needed–50% plus one MEP–to vote the directive through.
And if it passes both of those tests, the directive still needs to be passed by the European Council of Ministers.
Here, decisions are made using Qualified Majority Voting and the approach set out in the Treaty of Nice, potentially until 31 March 2017 if a member state asks for the Nice rules.
This means that three conditions need to be met for legislation to be passed:
1) the majority of countries: 50% if the proposal is made by the commission, otherwise 67%, and
2) the majority of population: 62%, and
3) the majority of voting weights: 74%.
If any one of the three conditions is not met, then a blocking minority has been achieved.
Also worth considering is the member states are given multiple votes, depending on their population size.
This means that 260 votes out of 352 are needed to pass new legislation, and 93 votes are needed for a blocking minority. The five countries that have already declared their opposition to IORP II have a total of 90 votes, meaning potentially just one more country abstaining or voting against the directive would be enough to get a block.
The JP Morgan Asset Management white paper could bring some comfort to the UK’s National Association of Pension Funds, which has been vociferously campaigning for the pensions element of Solvency II to be dropped for several years.
Speaking at the Money Marketing Retirement Planning Summit in Cork last month, NAPF EU and International policy lead James Walsh said officials at Eiopa, the European pensions regulator which advises the Commission, remains intent on reforming the pensions capital regime.
“The Solvency II funding proposals are not dead yet, they are only being shelved. I was in Frankfurt last week talking to some Eiopa officials and they said it will definitely happen,” he said.
“It will be up to the next EU Commissioner to make that decision, but Eiopa is clear that it wants to see this regime introduced.”
The full Sweeting/Christie paper can be read here.
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