A battle of wills has
erupted in the European Union over the thorny issue of defined
benefit pension scheme regulation. Insurers demand that pension
schemes be subject to Solvency II, a view opposed by pension scheme
bodies. Both sides have convincing arguments, reports Jeremy Woolfe
from Brussels.
Go deeper with GlobalData
Should work-place defined
benefit pension funds in the European Union be subject to Solvency
II regulation?
This is the burning question
that has sparked a war of vested interests between the insurance
industry, which is strongly in favour of this happening, and
occupational pension fund bodies that are vehemently opposed to any
change in their current regulatory environment.
On the insurance side, the
conflict of interests is being led by the European Insurance and
Reinsurance Federation (CEA), based in Brussels.
Its main adversaries for
pension interests are the European Federation for Retirement
Provision (EFRP), together with the European Association of
Paritarian Institutions (AEIP), both also in Brussels. The
‘referee’ is the European Commission, likewise in
Brussels.
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By GlobalDataThe European Commission has
the challenging task of achieving a common position. Because the
case made by each side is solid and highly defensible, it is an
un-enviable task.
Adjudication will come
eventually in the form of a White Paper, setting out revisions to
the current version of the Occupational Retirement Provision
Directive (IORP), a package of provisions that dates back to
2003.
The main position of the CEA
is that it strongly supports the application of the “same risks,
same rules, same capital” principle to all financial institutions
providing occupational pension products.
The CEA insists “it is of
utmost importance” to review the IORP directive in such a way that
a level playing field is guaranteed between all financial
institutions providing occupational pensions.
Across the European Union
defined pension schemes have assets of about €2.3trn ($3.2trn).
Based on 2008 data, life insurance companies have a market share of
47% in the provision of defined benefit occupational
pensions.
Pension fund bodies represent
some 140,000 pension schemes, according to research firm
Bfinance.
CEA’s
reasoning
The CEA continues with the
same, unanswerable, logic to argue for “similar rules to products
with similar risks”.
This is how the CEA expressed
itself during the summer of 2011, in a response to one of the
European Union’s three new financial regulators, the European
Insurance and Occupational Pensions Authority (EIOPA), which is
based in Frankfurt.
The authority had set up a
preliminary consultation to get in “advice” from stakeholders on
the IORP Directive
The CEA promotes the idea
that revisions to IORP should make it subject to the principles set
out in the Solvency II legislative package, of 2009.
Solvency II should serve as a
benchmark for the regulatory treatment of all financial
institutions offering occupational pension products, it
emphasises.
Solvency II is sometimes
called ‘Basel for insurers’, because it governs the amounts and
categories of capital that European Union insurance companies must
hold. It is being eased into effect, in a step-by-step process,
with a current target of concluding on 1 January 2013.
It is no surprise that the
CEA favours having the revised IORP directive drop an escape
clause, Article 17, which absolves the pension providers from
Solvency II rules.
The insurance industry body
argues that it shares the European Commission’s view that the
Solvency regime is “sufficiently flexible to respond the specific
characteristics of pension funds”.
Currently active in the
debate is the second of two consultations (CfAs) with stakeholders
by EIOPA. This consultation was announced in late October this
year, and is scheduled to remain open until January
2012.
Originally, the massive, 500
page set of statements and questions, was to have been responded to
after only four weeks. But the period was lengthened following
protests that insufficient time had been allowed.
The earlier,
preliminary and partial EIOPA consultation took place in July and
August 2011.
Sybille Reitz, EIOPA’s
spokesperson, told LII that the authority will eventually
digest the new responses from the stakeholders, and advise the
European Commission appropriately.
How long this will take has
not been announced, but it will doubtless take some time next
year.
Following receiving the
advice, the European Commission will carry out its own review of
the IORP directive considerations, to be ready to unveil its own
white paper proposals. Timing for these conclusions is currently
set at the third quarter of 2012.
It would be absolutely no
surprise if this date slips forward, possibly for months. It would
not be for the first time.
In fact, earlier this year
Michel Barnier, the responsible commissioner, expressed hopes that
its proposals for legislation would be published at the end of this
year, that is, before the present consultation ends.
There may be two factors
behind any delay.
One is a severe overload on
the European Commission’s staff devoted to drafting an
unprecedented torrent of general financial legislation in reaction
to the 2007-2008 financial crisis.
One senior European
Commission source told LII that legislative drafters were
putting in excessive hours. One such “victim” told the writer she
started at 8 am every morning, and worked through until 8 pm, every
working day.
Another factor behind
time-slippage could be the apparently insurmountable task of
meeting twin objectives.
These objectives are of
having to play fair with the insurance sector, while, at the same
time, without undermining the clearly desirable contribution made
by employees’ work-place-based top-up pension schemes.
One particularly tricky area
in this respect is how to enable employers to cope with cross
border considerations, when employees have moved from across
borders.
A maze of widely varied
work-place and social legislations across the European Union’s
patchwork of jurisdictions makes for horrendous
complexity.
EFRP’s
case
In order to express and
strengthen its case, the EFRP has posted on its website a statement
from the Dutch Pension Fund Federation, which states: “Pension
funds are – just like banks and UCITSs [mutual funds] – different
from insurers and hence require a separate regulatory
regime.”
The statement continues that
under pension plans, the “risks are shared collectively by
employers and employees. In some member states the plan sponsor may
be backing up pension commitments”.
The latter certainly applies
in the UK where the thought of Solvency II regulation of defined
benefit pension schemes has prompted fears of devastating financial
consequences for plan sponsors and the equity market.
The conclusion of the Dutch
federation is that pension funds bear a closer resemblance to
public pensions — which are supported by the tax payers — than to
insurance products. This differentiation in products calls for a
differentiated approach towards the regimes for funding, it
states.
This is all clear enough. It
is certainly logical. So, presumably, the life insurers should
kowtow to their brothers in the pension sector, retreat into a
corner, and lick their wounds.
Not at all! The insurers have
come back fighting. The level playing field issue has already been
recognised and enacted into European law in the past, the CEA
writes in its summer 2011 response to EIOPA.
Referring to the ‘Article 17’
factor, the CEA states that, according to the Life Insurance
Directive (Directive 2002/83/EC – to be recast by the Solvency II
Directive), any IORP underwriting against various liabilities
“shall hold a minimum amount of additional assets above the
technical provisions”, that is, as calculated under Solvency II
rules.
Massive
implications
Which of the opposing views
will prevail remains to be seen.
However, victory for the
insurance industry in the guise of the CEA appears likely to have a
massive cost impact on sponsors of employee pension
schemes.
Indicative of the potential
cost burden, the Confederation of British Industry (CBI) estimates
if Solvency II regulation were to be applied to defined benefit
pension schemes in the UK their total liabilities would increase by
up to £500bn ($780bn).
About 40% of total European
Union defined pension scheme assets of £2trn are held by schemes in
the UK.
The proposal to impose
Solvency II regulation on pension schemes is a “terrible idea”,
said the CBI’s chief policy director, Katja Hall in a
statement.
The proposal, she stressed is
based on a “wrong-headed insistence” that defined benefit schemes
are the same as insurance contracts. To comply with Solvency II
regulations as currently proposed, the CBI estimates that defined
benefit pension across the European Union would be forced to sell
listed shares worth £800bn and reinvest the funds in government
bonds.
This, warns the CBI, will
further depress yields on government bonds and create even more
pressure on pension scheme sponsors.”
The CBI and other opponents
of Solvency II regulation of defined benefit pension schemes are
probably fighting a losing battle against Solvency II regulation,
believes Jonathan Camfield, a partner at UK actuarial consultancy
Lane Clark & Peacock.
“EIOPA has indicated its view
that it is not a case of whether something like Solvency II will be
imposed on occupational pension schemes but rather how it will be
imposed,” said Camfield.
Underscoring Hall’s view, he
added: “It is no exaggeration to say that this has the potential to
be catastrophic for defined benefit pension schemes and equity
markets in the UK.”
Hall continued: “The only
silver lining is that EIOPA has recognised that there are important
differences between pension schemes and insurance
companies.
“It [EIOPA] has suggested
that one way forward might be to have a two tier approach to
funding pension schemes across Europe, with the implication being
that the UK would be able to continue with something closer to its
current regime, at least in the medium term.”
Hall stressed that this option is one of many and could be
strongly resisted by other European Union countries.
