(February 15, 2012) — Pension and insurance organisations have voiced their dismay at the European regulator’s suggestions to amend industry legislation, incorporating Solvency II, and urged the European Commission to rethink plans for harmonisation across the region.
Today, the European Insurance and Occupational Pensions Authority, one of three European Supervisory Authorities, revealed its feedback to the EC on major regulatory stumbling blocks for Institutions for Occupational Retirement Provision (IORPs) under proposed changes to current policy.
Last month, investment consulting firm Mercer warned companies offering defined benefit pension funds could be pushed into bankruptcy should new regulation be implemented in its current form.
The suggestions from EIOPA included accepting a limited form of Solvency II – legislation that would make IORPs drastically adapt their investment portfolios and operations to reach required levels of funding – and adpot a ‘harmonised balance sheet’ (HBS) approach that would see different countries’ pension regimes taken under one roof.
Joanne Segars, Chief Executive of the UK’s National Association of Pension Funds (NAPF), said: “We are disappointed that Europe’s pensions and insurance regulator is still proposing Solvency II-type rules for pension schemes, even though its own advice now acknowledges the damage that would be done to European pensions, jobs and the wider economy.”
She continued: “Solvency II would pile extra pressure on firms that are struggling to survive during these difficult times. The NAPF’s initial assessment shows that these rules could cost UK pension funds at least an extra £300 billion. Faced with extra funding demands, many companies would have no choice other than to close their final salary pension schemes.”
Earlier this week the NAPF, along with prominent trades union and employers groups, wrote to the President of the EC warning of these potential consequences.
Segars continued: “The European Commission and EIOPA should instead focus on where they can add real value. Their plans to improve defined contribution pensions and member communication are welcome, and we encourage the Commission to focus its attention on these areas.”
Elsewhere, Jim Bligh, Head of Labour Market and Pensions Policy at the Confederation of British Industry, said: “Businesses are seriously concerned by EIOPA’s support for a Solvency II-style tiering of assets, which would carry significant economic risks, with firms struggling to raise capital from markets and infrastructure funding being compromised.”
Zoe Lynch, Partner at Law Firm Sacker and Partners, said the firm was concerned with the possibility of Solvency II being applied to pension schemes, but EIOPA has its hand tied, to an extent.
Lynch said: “The main problem is that EIOPA has been given a narrow remit by the EU Commission – notably, the Commission has asked how funding requirements should be further harmonised, not whether they should be.”
EIOPA’s suggestions would also have an impact on the wider investment universe, according to Klaus Bjorn Rhune, Chairman of the EVCA Limited Partners Council and Partner at ATP Private Equity Partners.
Rhune said: “Solvency II rules will redirect investment towards lower return, fixed income assets such as government bonds, away from equity and growth asset classes such as private equity and infrastructure. This is because insurers’ capital requirements must be calibrated to the value at risk, marked to market, over a 12 month period.”
The idea of a ‘harmonised balance sheet’, which had been previously mooted by EIOPA, was dismissed as unnecessarily complex and unclear.
Lynch at Sacker and Partners said: “EIOPA’s HBS structure does not include concrete proposals for measuring either the employer covenant or the level of support to be attributed to pension protection schemes. In the absence of any proposed method for valuing employer covenant, it is not possible to comment in detail on the proposed implementation of the HBS.”
The announcement received one item of praise, however. Industry participants were cheered by EIOPA’s recognition that a planned impact assessment would have to be undertaken before any of its proposals should be agreed by the EC.
Segars at the NAPF said: “We are pleased that EIOPA has heeded our advice on the fundamental role of the forthcoming Quantitative Impact Study in assessing the impact of its proposals on pensions and the wider economy, and that it has made its recommendations conditional on the results.”
The EC will take a decision later in the year on what changes to make to the current Institutions for IORP rules.