European occupational pensions are a complicated animal, given that a handful of markets dominate the spread of assets and regulatory systems differ widely.
Sitting within this environment is the European Insurance and Occupational Pensions Authority (EIOPA), the body ultimately charged with overseeing the EU-wide pensions industry and what it sees as an absolute necessity – harmonisation. Gabriel Bernardino, its inaugural chairman, took up his role in March 2011. Today, he is almost four years into a five-year term, with a regulatory plate as full as when he first started.
Bernardino has had something of a fractious relationship with some of Europe’s largest pension markets. This is most evident with plans to stress-test pension scheme investments, and solvency requirements that, after being dropped by the European Commission, live on under EIOPA’s own holistic balance sheet (HBS).
In October, EIOPA published its six-framework consultation on the HBS, which would impose solvency requirements, or minimum funding levels, or act as a risk-management tool. Soon after its publication, Bernardino sat down with IPE to discuss his ambitions for pensions regulation.
“There is a red line for me,” Bernardino says. “What we propose will fulfil three criteria – enhance sustainability, provide stronger governance and provide full transparency. We will come with a proposal that makes sense, and one where we have listened, engaged and compromised.”
The authority does not have an outcome in mind, he says.
“EIOPA wants to get views from stakeholders,” he adds. “What we put [in the consultation] – quite successfully – was what we see as the pros and cons of each framework. The main aim is to see this challenged. We are open, and this is why we are consulting. You need to have an idea, but the one I have is not a choice between framework one or framework six – it is to listen. We are trying to include all the [pensions] mechanisms we have in the different countries. No country will have it all, but the tool can provide added value.”
The evolution of policy continues at full pace, but EIOPA has often faced criticism for attempting to copy policies into the pensions sector from its regulatory cousin, insurance. Bernardino brushes aside suggestions that the HBS was an example of this, and says the consultation proves the authority is focused on the economic concepts behind pensions. But on EIOPA’s other major project for pensions – the stress test – a system for insurers has already been developed. Bernardino promises a whole new test that will be complementary to pensions.
“Of course, we have experience in developing stress tests in the insurance and banking sectors, but pensions are different,” he says. “We want to do this in a sound and proper fashion rather than doing a test for the sake of doing one. We are trying to do this properly.”
Plans for the stress test are already in place. National regulators in the EU will approach an array of defined benefit (DB), defined contribution (DC) and hybrid schemes and ask for investment data spanning 10 years. The idea, Bernardino says, is to use the data to see which stresses are relevant to fund investments. Essentially, the idea is to determine whether the pension fund investments are pro or anti-cyclical.
The test will assess a variety of risks, and, in light of turmoil in some European sovereign markets, move away from the concept of risk-free assets and incorporate sovereign default risk. “It links to what we did on the insurance side,” Bernardino says, “which included studying the low-interest-rate environment, the re-assessment of risk premia, what happens if there is a reassessment of spreads and its impact on the portfolio. In there you have sovereign debt and, of course, moving away from classing them as risk-free.”
Bernardino says EIOPA is aware of this and investigating the idea behind emerging risks, such as resource and climate risk or stranded assets. But he says knowledge is in its infancy and not strong enough to be included. He remains adamant about the objectives of such a test and strenuously denies that it could be used to create solvency requirements comparable with the insurance and banking sectors.
“A risk-based regime needs to ask ‘what if’ – and this question has to relate to stringent and robust stresses,” he says. “The value of this test is to use it as a supervisory and risk-management tool instead of a capital-definition tool, like in the banking sector. That is not healthy. You are always second-guessing the capital requirements, and this does not make sense. We want to use it to find vulnerabilities because, if you understand these, then you are prepared. It is a preventative tool, not a repair tool.”
How will Bernadino and EIOPA look back on the current proposals, given the criticisms received from different markets? There have already been calls for a post-implementation impact assessment on insurance regulations, and Bernardino, with his quarter of a century of regulatory experience, fully backs this approach and says the same must apply to pensions – if not all regulations.
“Every time you regulate, you should always do an assessment of the implications, but also of the benefits,” he says. “What we need to do, and I really commit to this, is post-evaluation. This is part of better and smarter regulation. All regulators are human. Intentions are always good, but we are never 100% sure if we will deliver the objectives we want. We need to have the courage to have a serious post-evaluation, and, if things with good intentions have consequences, then we should change them. Regulation needs to be linked to the practical effect it has on the benefit for consumers. If it doesn’t work, change it.”
Within this, Bernardino promises respite for schemes if EIOPA’s ideas do not go 100% to plan, particularly with respect to an HBS proposal that could affect a single market more than others. “If we bring a proposal that causes negative effects in some situation, then we will bring transitional mechanisms. We do not want to disrupt markets, of course not. I am more interested in setting future standards of sustainability. But we need to deal with the past.”
Timelines for the any changes are still unknown, although EIOPA says the stress test will take place in early 2015 and coincide with quantitative assessments on scheme solvency as part of the HBS consultation. The future for pensions looks towards one of tighter regulation and stricter requirements. EIOPA is expected to become independent of taxpayer funding and be directly financed by levies, potentially giving the organisation greater freedom.
Bernardino, who will end his chairmanship in 2016, capping almost 30 years in regulation, has not ruled out a change of direction. Coyly, he says it is early days for a decision. “I like and I am passionate about what I am doing,” he says. “But things change and move, and I do not know what the reality will be in one or two years’ time, so it is too soon to say.”