EUROPE - The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has agreed Solvency II for pension funds is "not an appropriate course to pursue" and could threaten defined benefit (DB) provisions.

CEIOPS makes the comments in its new report on fully-funded, technical provisions and security mechanisms in the European occupational pension sector, which will inform the European Commission in its plans for a broader consultation on pensions and solvency.

The report acknowledges the "natural limits" in the European directive for institutions for occupational retirement provisions (IORPs) - because of substantive variations in regulatory requirements in the various member states - could spur regulatory arbitrage, and says indications of this have recently emerged.

A comparable member protection for IORPs is needed to ensure a level-playing field between countries, but implementing Solvency II to pension institutions is not the way forward, suggests CEIOPS.

"While an integral application of Solvency II requirements to pension institutions could resolve this issue, the material difference between pension funds and insurance companies in many countries suggests this is not an appropriate course to pursue."

This comment appears to match the opinion of pensions industry experts, who have argued for some time any Solvency II-type regime for pension schemes would substantially increase funding requirements when it was not necessary.

Chris Verhaegen, secretary general of European Federation of Retirement Provisions (EFRP), today declined to comment on the report as the EFRP first wants to examine it carefully, though added the EFRP would welcome if CEIPOS recommends against the application of Solvency II to pension funds.

However, Ieke van den Burg, a Dutch member of the European Parliament,  told IPE in February EU's current pension regulation "is inadequate, in that it completely relies on national prudential rules and methodologies, which may create risky situations and regulatory arbitrage, seducing funds to the lightest regulatory regime". (See earlier IPE article: EC to stage pensions assets enquiry)

This also conflicts with the view of European Commissioner Charley McCreevy, who previously suggested the EC would be unlikely to introduce reforms which might damage the existence and viability of defined benefit pension schemes. (See earlier IPE story: EC unlikely to risk pensions closures with Solvency II)

Moreover, according to the latest CEIOPS repport, implementing Solvency II for pension funds could lead to excessive costs and therefore threaten the continued provision of defined benefit schemes.

Mark Dowsey, a senior consultant at Watson Wyatt, said the report highlights the difficulties the EC would face if it decided solvency requirements for pension funds should be harmonised, commenting funding regimes for pensions in the various member states are far apart.

Dowsey added the report "reinforces the view that, at least in the first instance, cross-border pensions are likely to be defined contribution (DC) in nature".

CEIOPS' survey also summarises the current obstacles to a harmonised pan-European pension framework,as it mainly shows existing frameworks in the European Economic Area (EEA) are determined by the various national social and labour laws and market differences.

Moreover, funding provisions need to balance beneficiaries' security and the associated costs, says the organisation, arguing this balance is currently struck at different security levels in each country.

"The concern is also felt that heavy funding requirements may impose inappropriate large up-front payments that are not needed because of other security mechanisms in place, thereby discouraging defined benefit pension provision," stated the report.

Other themes discussed in the report are the different valuation methods and security mechanisms member states currently use, while summarising four common "overarching principles", as identified by the member states, which should underpin a pension supervisory framework.

These principles include a forward-looking risk-based approach to pension supervision, the principle of market-consistency in the valuation of an IORP's assets and liabilities, reflecting the fund's actual financial position, and transparency.

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email