Pensions in the picture
Just three years after Europe’s pension fund representative bodies were successful in their proposal to create a separate occupational pensions stakeholder group within the European Insurance and Occupational Pensions Authority (EIOPA) – under the previous CEIOPS committee of pension and insurance supervisors a single stakeholder group covered both sectors – there is now a proposal to merge the two stakeholder groups. Although this will have to be ratified by the European Parliament, here are a few points that might help those involved understand why this issue really matters.
• The insurance industry is heterogeneous, from property and casualty to life insurance. In the vast majority of cases, institutions for occupational retirement provision (IORPs) are not-for-profit entities whose main task is securing pensions for their members.
• IORPs are independent entities, usually constructed as independent trusts or guarantee similar independence through their board structure.
• Companies and industry sectors have established independent pension funds for the simple reason that it is cheaper in the long run to create a pension fund than to buy pension services through a contract from an insurance company.
• As independent entities largely run on a not-for-profit basis, IORPs broadly do not compete for the same pension business as insurers.
• Some IORPs are structured as insurance entities, in countries such as Germany, Denmark and Sweden, but this is for historical and cultural reasons. The mission and purpose of a pension entity remains distinct from that of an insurance company.
• Insurers should be understood as service providers to IORPs when buying out liabilities in whole or in part, as providers of life annuities to individuals in defined-contribution pensions and as providers of investment services through asset management subsidiaries.
• In certain circumstances IORPs may compete with insurers, for instance if a company IORP is assessing the relative merits of insuring its liabilities through a buyout versus joining a multi-employer IORP. In the former case, the IORP faces two different services for which it pays differing prices, at least to discharge its liabilities versus ongoing contributions to an IORP. In the latter case, contracts with commercial insurers are unlikely to compete against not-for-profit IORPs, other than the smallest schemes. In neither case does an IORP have an unfair competitive advantage over an insurance company.
• An IORP does not face the same business risks as a life insurer as there is a sponsor on which its board or the regulator will have recourse to make good any funding gaps. The long-term investment horizon of the IORP means a recovery plan can take place over a number of years. It presents no systemic risk to the wider economy.
For reasons of regulatory ease, the European Commission has sought to regulate financial services on a ‘same risk, same rules’ basis in recent years, and it has been an easy decision to group occupational pensions with life insurance, for instance in the committee that became EIOPA, and at various times in legislative proposals, such as Solvency II. This lumping together is something the insurance industry has not fought; the relative might of its lobbying power has meant its views often prevail anyway.
The EU is one of the world’s two main global financial services reform powerhouses with preservation of macro-economic stability as a key priority. From such lofty heights, it is understandable why the Commission should seek to lump pensions and insurance together. At best, the Commission has paid lip service over the years to the idea that IORPs and life insurers have profoundly different needs. While merging the stakeholder groups might seem like an administrative convenience, it sends out a signal that those with power and responsibility simply do not understand the importance of efficient long-term pension saving and its role in the wider economy.