IORP II: Keep it proportional
PensionsEurope gives a general thumbs-up to Brussels’ planned improvements to governance standards for occupational pensions. But revisions to the IORPS II Directive must not be “burdensome”, urges the organisation’s secretary general, Matti Leppälä.
He highlights fears relating to the fragility of the smallest second pillar workplace pensions, especially in times of fragile economic growth.
In an interview with IPE, Leppälä repeatedly uses the term “proportionality”. By that, he means that the new rules should be tailored to suit the nature of different types of IORPs.
Leppälä admits, however, that the concept of proportionality could be hard to express in legislative terms. Hence, he calls for clarity at the Commission’s initial proposal level. This will be necessary to avoid clashes with EIOPA’s eventual level two and three rules, which will emerge after the present Directive is amended.
Insufficient attention to proportionality could result in the rules becoming too prescriptive or onerous, leading to the closure of some schemes. However, when it comes to governance matters generally, including disclosure aspects, he states: “We are in favour… We have all along said there is room for improvement here.” He stresses the relevance to DC schemes.
Leppälä would deviate quite far from many proposed reforms specified in the July’s extensive discussion paper on governance from a working group of the Occupational Pension Stakeholder Group (OPSG), attached to EIOPA.
Where the OPSG members recommend that a common and public reporting mechanism be applied to all IORPs, he raises the question of cost. He cites a survey of PensionsEurope members which forecast that the charges for governance and disclosures could rise considerably.
The OPSG stakeholders say that many of Europe’s estimated 140,000, mostly small, pension schemes are less efficient than if the individual retirement saver invested alone.
Leppälä states this simply ignores the high cost of sales. His view is that collective pension schemes are more efficient. However, he does advocate a “comply or explain” approach for any new qualitative disclosure requirements. This would enable certain opt-outs for specific rules. Similarly, he would like to see “long enough” transition periods for implementing new rules.
Concerning comparative minutiae, and dealing with the OPSG recommendation that non-executive boards should contain at least two financially qualified people, Leppälä says: “One should leave the governance structure to those who bear the risk” – in other words, employees and beneficiaries.
Imposing high investment expertise requirements on boards, he believes, could mean the voice of experts outweighs that of employee representatives. He notes that the blame for the financial crisis must be placed on the financial market’s so-called experts.
However, Leppälä does add: “We are in favour of taking steps to increase the knowledge base of the non-executive role”. He points out that variations in approach to professional expertise vary widely. High formal requirements, which are in place in Italy, are even higher than in, say, the Netherlands.
Leppälä also notes that such issues were already covered in June 2009 in the OECD’s Guidelines for Pension Fund Governance.
He believes the OPSG, with its project compiled during the limited period from February to June, would be better if it had referred to the OECD guidelines, which were prepared by pension fund experts working over several years.
References to an OECD report on insurance entities were to “a significantly different sector, where entities tend to be much larger”, he says.
Referring again to proportionality, he adds: “Our concern is for smaller IORPs to be able to continue to outsource many functions, such as for actuarial services, for reasons of economy.”
Hanging over the entire debate today is the eventual decision, deferred by Commissioner Barnier – but still in the offing – on holistic balance sheet measures akin to Solvency II.
Leppälä describes such a prospect as an “insurance-like solvency requirement”, entirely inappropriate for Europe’s €3trn-plus pension fund sector. This “political matter” is still with EIOPA, he notes, with obvious apprehension.