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IPE special report May 2018

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CEE countries unlikely to come under IORP directive, predicts EIOPA stakeholder member

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  • CEE countries unlikely to come under IORP directive, predicts EIOPA stakeholder member

EUROPE - The mandatory retirement pillars of central and eastern European (CEE) countries, as well as unfunded pension funds, will not be subject to a new IORP Directive once the new draft is published, a member of the European Insurance and Occupational Pensions Authority (EIOPA) stakeholder group has predicted.

Addressing the National Association of Pension Funds (NAPF) annual conference in Manchester yesterday, pensions lawyer Ruth Goldman gave her impressions of a recent meeting of the stakeholder group - where she represents occupational schemes - and criticised that the shift towards heavier regulation for funded schemes, with continued lack of regulation for unfunded pillars, made "absolutely no sense".

Highlighting some positive news, she also indicated that the European Commission was aware of the impact Solvency II would have on pension funds and their recovery plans, insisting there was sympathy for the situation in which this placed this funds.

Goldman, a partner at law firm Linklaters, said that her "steer" from EIOPA was that the mandatory pension pillars launched in CEE countries over the past decade or more would not fall under the new regime, due to a "strong political pushback".

The European Federation for Retirement Provision previously predicted that bringing the mandatory pillars under the IORP Directive would lead eastern European states to follow the Hungarian example of bringing private pension savings under control of the country's treasury.

Hungarian prime minister Viktor Orban in June saw the proposal to transfer private pension scheme assets to the treasury approved, with the €11.8bn in funds used to reduce the country's deficit.

Goldman added that pay as you go pensions, as well as social security systems would also not come under the new IORP Directive, expected to be published next year.

"So the irony is that schemes that have got some security are going to have to have even more security 
and therefore probably end up closing," she said, adding that the schemes that started off with no security "remain untouched, which makes no sense to me at all".

Asked about the deficits that schemes would be burdened with under the new regulatory framework, Goldman said this was an area she was more hopeful about - citing Commission estimates that Solvency II would increase capital requirements by anywhere between 10% and 45%.

"We know it's a substantial amount of money," she conceded. "We also know there is quite a lot of sympathy to the pushing out of recovery plans in the current environment.

"I think that is one area where the Commission is very conscious it mustn't destroy sponsor covenants and sponsor goodwill, as well as jobs for the sake of a speedy recovery," she added.

However, she predicted that funding would not be addressed in the initial directive, but as part of the level II legislation introduced later - although the principles underlying it would be agreed upon now.

Goldman also said that the Commission was "very keen" to see a universal standard measure applied to sponsor covenants, but insisted that any regulation needed to take into account the UK's Section 75 regulation - under which a company was require to pay trustees any outstanding deficit in case of an insolvency - as it was stronger than regulation in other European states.

She added there were "nuances" around the subject and, referencing the date EIOPA would launch its next consultation, said: "If they are not in the document you get on 25 October, then we should make Europe very, very aware of it."

Michael O'Higgins, chairman of the UK Pensions Regulator later told the conference that these issues had been raised by them during their IORP consultations and predicted that the directive would not come into force before 2016.

He told delegates that the "intricacies" of the UK system had been highlighted, adding: "Full credit should be given to sponsor support when calculating assets and liabilities."

Goldman meanwhile was less certain about how the use of contingent assets would be accounted for, saying they were a "big nightmare" and concluding that the industry would have to wait and see.

Contingent assets have become an increasingly common tool for sponsors to employ when funding a deficit, with a number of companies transferring the deeds of properties to trustees, then leasing these back on a long-lease basis, while drinks giant Diageo transferred whisky to its DB scheme in an effort to tackle a £862m (€929m) shortfall.

She further questioned the impact of a 'fit and proper' test for trustees - previously attacked by the NAPF, who argued it was "essential" UK trustees be allowed to continue their work under the current legislation, representing member interests.

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