EIORP consultation ‘undermined’ by failure to cover member state supervisory actions on under- funded schemes
EIOPA’s consultation on revisions to the IORP Directive is undermined by its failure to consider what actions member state regulators will expect pension schemes or their sponsors to take if a pension scheme is deemed to have insufficient assets, says Mercer. The consultancy believes that this underlines the perception that regulation is being proposed, not on the basis of its suitability, but because it exists already, albeit applied to another industry with broadly comparable objectives.
“Regulation needs to be sensitive to the objectives of the entities being regulated and to support those entities achieving those objectives,” commented Dr Deborah Cooper, Partner at Mercer. “The consultation goes into great detail on how assets and liabilities should be measured but contains nothing substantial about the steps that have to be followed if a scheme’s assets fall 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.”
“The EC set EIOPA the challenge of working out how to apply Solvency II to pension schemes, rather than improving the regulation of pension schemes per se,” said Dr Cooper. “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. The lack of attention given to action over underfunded scheme speaks volumes.”
There is concern in the UK pensions industry that EIOPA is proposing to apply Solvency II rules to pension schemes without adequately recognising the differences between them and insurance companies. In particular, although insurance companies can raise capital from shareholders and financial markets to improve their balance sheet position, pension schemes don’t have that facility – they can either reduce benefits or ask for extra finance from the sponsoring employer.
According to Mercer, while it seems that this decision is deferred to higher powers, were SII hypothetically applied without taking into account pension schemes’ different characteristics and objectives, the cost of maintaining the same level of reserves in their pension schemes - as currently fall upon insurance companies - would be prohibitive and drive many companies to insolvency. This is likely to result in worse outcomes for scheme members. As it is, the current proposals are already estimated to add additional costs to the provision of DB schemes in terms of disclosures, trustee training and the complexity of the regulation.
“Logically,” pointed out Dr Cooper, “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.”
“We also feel that the EC has set very narrow objectives,” said Dr Cooper, “and because EIOPA's remit is constrained, there is a real threat that it will fail to provide best advice to the EC about the future of pension scheme regulation. EIOPA could, instead, have put more emphasis on the risk management tools provided by many of the principles underlying Solvency II, rather than concentrating on narrow and not necessarily appropriate financial measures. We would also welcome anything that facilitates the development of pan-european pensions as they are of great interest to our clients, but practical solutions to the particular difficulties they face risk getting sidelined by the drive towards harmonising regulatory approaches.”
EIOPA has said that a revised IORP Directive could be ready for consultation before the end of 2012. Mercer considers this timetable to be too tight, since there is so much about the proposals that is still unknown, or cannot be considered properly because either the detail is not available or prerequisite political decisions are unlikely to have been made. “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,” concluded Dr Cooper.
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