The European Association of Paritarian Institutions (AEIP) is calling on pension regulator EIOPA and the European Commission to further consider the use of the proportionality principle. The organisation fears an increase in costs for small and medium-sized pension funds.

In its recent consultation paper for the upcoming review of the IORP II Directive, EIOPA advocates a reconsideration of the proportionality principle that underpins European pension supervision.

Under current regulation, pension supervision should be applied in a proportionate manner, related to the size and internal organisation of IORPs and/or the size, nature, scale and complexity of the risks of their activities.

Size threshold

Currently, pension funds with fewer than 100 members are eligible for a lighter regulatory regime, to the discretion of their national supervisor. Similarly, the “internal organisation” of pension funds (i.e. the degree of outsourcing and the number of staff) can also be grounds for a less stringent regulatory regime.

In its consultation paper, EIOPA suggests this proportionality principle should be reconsidered.

“Although small IORPs are more likely to have a low risk profile, this is not necessarily the case,” EIOPA said. It added: “Similarly, the IORP’s ‘internal organisation’ should be aligned with its risk profile, rather than the risk profile following from the internal organisation.”

One size does not fit all

In a first response to the consultation paper, AEIP has raised concerns about the regulator’s views, stating that “the adoption of a one-size-fits-all approach does not work for the IORP sector, as it generates unnecessary costs, especially for small and medium-sized IORPs”.

“It is really important for us to retain minimum harmonisation and achieve more proportionality, and as such it is surprising to see they want to remove size and internal organisation,” commented AEIP policy adviser Panayiotis Elia.

“Size is an important and relevant criterion when applying proportionality and it can be easily assessed and quantified,” he added.

In its own IORP II position paper published in January 2023, AEIP suggested improving the definitions of small and micro IORPs, without providing further detail.

Panayiotis Elia at AEIP

Panayiotis Elia at AEIP

Elia explained AEIP is now assessing if this option is still relevant given the suggestions made by EIOPA in its consultation paper.

These suggestions include the option to increase the threshold for a pension fund to be regarded as small from 100 to 1,000 members, while introducing a separate, additional threshold of €50m in assets.

This would, in theory, make more pension funds eligible to be considered as small. Because of the current limit of 100 members, only two member states (Cyprus and Finland) indicate a quantitative size threshold in their national regulation.

Cost concerns

While potentially reducing costs, increasing the threshold for small IORPs comes with the “danger that small IORPs with a high-risk profile may inadvertently be subject to insufficient regulation/supervision, jeopardising the protection of members and beneficiaries”, according to EIOPA, which is now seeking input from stakeholders on the matter as it “has not concluded on whether the benefits of the option would outweigh the costs at this stage”.

AEIP’s Elia was unable to comment on EIOPAs proposal to increase the threshold as “we are still assessing and discussing internally this option”. He added, however, that the reduction of costs of pension supervision should be “a guiding principle” for the IORP II review.

Separately, when it comes to the integration of sustainability factors in a pension fund’s investment policy, AEIP mentioned that as a principle it is right to consider the preferences of people on whose behalf the contributions are invested.

However, according to AEIP, it remains “challenging to translate these preferences to a single investment policy”, in addition to surveying being “cost-intensive”.

Therefore, a fund’s board needs to have sufficient flexibility to accommodate all views, the organisation said in its position paper. On this matter, AEIP underlined that in paritarian pension funds (that have been set up by collective agreements) the investment decisions are taken by the board, not by its members. 

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