 By Hugh Nolan, Chief Actuary, JLT Employee Benefits
I remember attending a political fund raiser some years ago where the local MP drew a raffle prize for “an all expenses paid Eurostar trip to Europe”, before being reminded that strictly speaking we were already in Europe… I’m not sure he was pleased by the reminder, partly because of his embarrassment at having his gaffe pointed out and partly because I suspect he wished it wasn’t so. Frankly, IORP II makes me feel the same way.
IORP II is the long, but not necessarily eagerly, awaited follow-up to the Institutions for Occupational Retirement Provisions (IORP) Directive 2003.
It was intended to have three pillars, Quantitative (valuation rules and capital requirements), Qualitative (supervisory and governance) and Disclosure (public and regulatory). Thankfully Pillar 1 has bitten the dust for now at least but the row over that diverted all our attention so the other two are sneaking in without much moderation. Surely EIOPA (the European Insurance and Occupational Pensions Authority) didn’t plan it that way, did they?
In fact, I doubt they did. Not only was it a close call but EIOPA remains very keen on the holistic balance sheet approach and will be coming back for another bite of the cherry with further consultation in 2014, though how much this will change EIOPA’s existing view is open to question. The last consultation response noted that the risk management section “is generally considered … to be too prescriptive” but “EIOPA believes the section is sufficiently principles based.” Well, that’s all right then!
The Quantitative Impact Study (QIS) requested by the European Commission (EC) highlighted the disproportionate impact Pillar 1 would have had on the UK. EIOPA’s report on the preliminary results noted that IORPs in the UK have a “negative excess over liabilities” (known colloquially as a “deficit”) of 963 billion euro in the upper bound scenario. HM Treasury joined forces with their counterparts in the Netherlands, Ireland and Germany to express concerns and noted that these countries combined account for over 90% of IORP’s liabilities within the EU. The aggregate benchmark deficit for the UK in the preliminary QIS results was over 500 billion euro, with the Netherlands a distant second with around 200 billion euro and Ireland in bronze place with a paltry 100 billion euro aggregate deficit. Germany’s aggregate deficit estimate at only some 10 billion euro is a perfect illustration of the gap between us and the rest of the EU here.
Based on the benchmark liabilities in the QIS, the best estimate technical provisions in the UK was just under 2 trillion euro for the UK out of a total of 3.2 trillion euro covered by the study. This gives us more than a 60% share of the liabilities covered by the study compared to our block of 29 votes out of 345 (8.4%) on the qualified majority voting system. Fortunately, the combined votes of Germany (29), the Netherlands (13) and Ireland (7) joining us gives 78 votes and we only need 91 in total to block proposals. As long as we keep the Belgians (12 votes) sweet, even Malta (3) or Estonia (4) could be our new best friends in Europe. So all we have to do is keep our poaching hands off Adnan Januzaj and hope that the EC doesn’t work exactly the same as the Eurovision Song Contest and we’ll be okay.
As a naïve optimist, I am therefore confident I can safely move on from Pillar 1 secure in the knowledge that common sense will prevail and we will not suffer a painful funding regime imposed from Europe against the wishes of the countries actually affected by it. I’m also lucky that my training as a Scheme Actuary will enable me to find a plausible explanation for any variation from this assumption that may well transpire in practice. Watch this space!
Pillars 2 and 3 are much less contentious but the devil will be in the detail. It’s hard to argue that improved governance is a bad thing per se and I firmly believe that members of pension schemes deserve to have their interests looked after properly. However, it’s also hard not to be slightly nervous when EIOPA has said publicly that “size … alone can never be a reason to accept simpler solutions”. Schemes with under 100 members fall outside the IORPs scope so size is recognised as a factor in imposing governance standards and I can’t imagine many smaller IORPs being willing or able to spend as much on compliance as the biggest schemes. We should surely be looking at risk-based assessment and avoid unnecessary, costly and unhelpful bureaucracy.
Similar comments apply to the disclosure requirements on Pillar 3. Transparency is good but excessive disclosure isn’t necessarily the right alternative. The key here is to get the right disclosure so that appropriate action can be taken where needed, rather than carrying out a lot of form-filling and box-ticking so that no-one has the time to analyse all the output properly.
I am given hope by a story told me by a Roman Catholic priest to explain the tension between his typical parishioner and official doctrine. He put this down to an innate British tendency to try to follow the rules strictly and recommended a more laissez-faire approach, which I’m guessing from the name is the French approach. Maybe even EIOPA’s worst excesses can be mitigated by a dose of common sense in the way we apply them.
Finally, this article wouldn’t be complete without a passing mention of the recent report by the European Parliament’s Committee of Economic and Monetary Affairs that recommended an independent budget for EIOPA paid for by “market participants and the Union” (ie pension schemes and taxpayers). More regulation and higher charges do not seem to be the ideal way to tackle UK pension issues.
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