Mercer Predicts Bankruptcies Due to “Shoe-horn” Approach to Pension Regulation

(January 12, 2012)  –  European companies offering defined benefit pension schemes could be forced into bankruptcy if they are forced to comply with unsuitable regulation, after failings by the region’s industry body to consider the full impact on retirement saving plans, investment consultant Mercer has said.

A consultation led by the European Insurance and Occupational Pensions Authority (EIOPA) into the practicality of retirement savings plans adopting the Solvency II regulation intended for the insurance industry has been undermined by a failure to address some major points, Mercer said.

Applying Solvency II measures to occupational pension schemes could even drive sponsoring companies to insolvency, Mercer said. Solvency II was proposed to regulate insurance companies against imbalanced assets and liabilities. Due to the similar nature of pension schemes, it was then proposed that it could apply to pension schemes

Although insurance companies can raise capital from shareholders and financial markets to improve their balance sheet position, pension schemes do not have that facility – they can either reduce benefits or ask for extra finance from the sponsoring employer.

Deborah Cooper, Partner at Mercer said: “Logically, a conclusion of applying Solvency II directly to pension schemes is to give pension regulators control over company budgets. This would require a fundamental rewrite in company law, potentially undermining banking covenants and corporate borrowing practices.”

Whether Solvency II will be implemented, and in what form, has not yet been decided.

Cooper said: “Whilst there are many aspects of Solvency II that could usefully be adapted, many other features are not transferable. In any case, no one in the insurance industry would pretend that Solvency II is the epitome of financial services regulation: its implementation has been a hugely burdensome and political process, and the EC and EIOPA need to learn from this.”

She added: “The lack of attention given to action over underfunded schemes speaks volumes.”

Cooper said the consultation went into great detail on how assets and liabilities should be measured but contained nothing substantial about the steps that have to be followed if a scheme’s assets fell short of its liabilities.

“This is absolutely fundamental to the regulatory process and highlights one of the key differences between a pension scheme and an insurance company,” she added.

The timescale and scope of the consultation was also criticised by Mercer, which said holding a fact-finding mission on a directive revised by these latest, allegedly flawed discoveries by EIOPA was too soon.

Cooper said: “Unless there is further consultation and discussion, that facilitates more considered responses than the narrow questions and draft proposals in EIOPA’s recent document, the outcome could be less than satisfactory for all parties.”