‘Disappointment’ in European Pension and Insurance Regulator

Disappointment and dismay as European regulator misses chance to make major changes to pension and insurance regulation.

(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.

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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.

Towers Watson Launches First Transition Management Service

Towers Watson is creating the first panel of transition managers to make the service more easily available for investors and monitor the outcomes.

(February 15, 2012)  —  Towers Watson has become the first consulting firm to line up a panel of transition managers for institutional clients switching fund mandates, as investors worldwide more closely scrutinise the performance of their individual providers.

The consulting firm is in the process of bringing together a group of providers to be made available to investors looking to move portfolio assets and will act as a middleman to avoid lengthy and complex tendering processes by individual pension funds and other institutions. It will also tackle any operational or post-trade issues.

Colin Rainbow, Senior Investment Consultant and co-ordinator of the panel, told aiCIO: “It is the first panel of its kind in the industry. Implementing a panel will be cheaper and a quicker process for investors as they do not need to go through the tendering and much of the legal aspect.”

Some larger pension schemes, such as the Pension Protection Fund, the United Kingdom’s lifeboat for bankrupt company funds, and the Merseyside Pension Fund have established their own in-house transition management panels. This allows them to have providers on standby should they want to move assets quickly.

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Rainbow is setting up the panel in the UK to begin with, but is likely to expand the idea globally over the next 18 months.

The company has hired Jag Bains to its quant group and he will be one of the transition management panel reviewers.  Bains is well known to the market, being the ex-head of Barclays Global Investors’ (since merged with BlackRock) transition management business.

Rainbow said Towers Watson would monitor each member of the panel as part of the business proposition, at a time when there is increased scrutiny: “If there is a problem with one provider, Towers Watson will deal with it and seamlessly replace them with another – the client does not need to get involved.” 

As a supplement to the panel, Towers Watson will also offer a service to examine the performance of the transition manager and post trade activity.”

Last year State Street took action to compensate clients it had overcharged through its transition management franchise in the UK. In the United States State Street and other custodians acting as transition managers have faced legal claims from institutional investment clients over their charging processes for foreign exchange practices.

For an in-depth look into the murky transition management business, watch out for aiCIO magazine, published in late February.

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