European Pensions Slip the Solvency II Noose (For Now)

(May 24, 2013) — The European Commission has postponed the implementation of insurance-type solvency regulations on pension funds, giving schemes more breathing room on investment and liability matching.

Commissioner Michel Barnier said yesterday that the Solvency II regulations would not be imposed on the continent’s pension funds as more information was needed on whether the rules were appropriate and what effect they would have.

“I have decided first of all to present a legislative proposal focussing on governance, transparency and reporting requirements for occupational pension funds [in autumn 2013]. On those aspects there is broad consensus, at least on the principles,” said Barnier.

“This proposal will not cover the issue of solvency rules for pension funds, which will for the time being remain an open issue. In my view, the situation should be re-examined once we have more complete data. (…) We must not lose sight of the need to guarantee in the longer term a level playing field between different providers of occupational pensions.”

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The move was widely welcomed across the pension industry, which has repeatedly called for these rules – that were initially intended to just cover the insurance sector – to not be applicable for pensions.

“Commissioner Barnier has made the right decision as it is vital to take more time for a thorough analysis of the effects of possible changes in solvency rules, which differ greatly between Member States,” said Matti Leppälä, PensionsEurope secretary-general and CEO.

“The great diversity of pension systems across the EU makes it very difficult to devise a ‘one size fits all’ system,” said James Walsh, EU & international policy lead at the UK’s National Association of Pension Funds. “We welcome Commissioner Barnier’s sensible decision not to go ahead with new rules on pension scheme funding. The proposals could have increased UK defined benefit pension deficits by 50%, causing great damage to pension schemes and their sponsoring employers.”

Some urged caution however, warning that the issue had not been dropped entirely.

“It would be premature to think that the Pillar 1 proposals have gone away for good,” said Punter Southall Head of Research, Jane Beverley. “Commissioner Barnier notes that solvency rules for pension funds ‘remain an open issue’ and that ‘the situation should be re-examined once we have more complete data’…The proposed holistic balance sheet may still therefore appear in a different guise, although not until after the end of the current term of the Commission in 2014.”

To read Barnier’s speech, click here.

Related content: Solvency II – Put Us Out of Our Misery

(May 23, 2013) – Defined benefit plans made a tidy 2.74% average return in 2011, while defined contribution pots were poorer by the year's end, down 0.22%.

This marked the largest performance gap between the two retirement savings structures since1995, according to Towers Watson, which released the data. The consultancy/asset management firm has been measuring this performance differential for the last 18 years.

"Since the beginning of our study, DB plans have consistently achieved better investment returns than DC plans, except during boom stock market years," said Towers Watson's Chris DeMeo, head of investment for the Americas. "However, the spread between the two has been narrowing, and with many sponsors adjusting the asset allocation strategy of their DB plans to better match assets to liabilities, the disparity may diminish further in the future."

Liability-driven investing strategies in fact improved the DB sector's performance in 2011, however. As plan sponsors shifted assets from public equities to long bonds in an effort to better match duration, they also found far higher returns.

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Defined contribution allocations tend to be much heavier on stocks than DB portfolios are, which has previously lead to narrower performance gaps during bull markets. In 2011, equities made up an average 48% of DB assets, and 60% of the average DC portfolio, according to the study.

Given stock markets' record-breaking performances since 2011, Towers Watson's Dave Suchsland, a senior retirement consultant, predicts that next year's study will show both DC and DB in the black.

"Given the strong performance of equities in 2012 and the declining interest rates that led to higher fixed-income returns, it's likely that our next analysis will show improvement in both DC and DB plan returns," Suchsland said. "With more DC plans assuming some DB plan characteristics…DC plan participants now have additional opportunities to improve the performance of their portfolios."

Towers Watson's analysis is based on the Department of Labor's form 5500 financial and pension disclosures, which have been released through 2011. More than 2,000 firms sponsoring both DB and DC plans, each with at least 100 members, were included in the study.