The recent finding by the European Commission's committee of European insurance and occupational pensions supervisors (CEIOPS) that Solvency II for pension funds was "not an appropriate course to pursue" and could threaten defined benefit (DB) provisions was welcome news to the European pensions industry.
CEIOPS' view was expressed in a report on institutions of occupational retirement provision (IORPs), which will inform the Commission's plans for a broader consultation on pensions and solvency.
The report suggested that the EU's pensions directive needed some smoothing round the edges. It found that the process of implementing the directive had been largely successful, apart from "some areas where action appears to be needed for clarity and for supervisory convergence". It added that there was "little evidence of major issues arising" from the differing interpretations by member states of the directive.
But it called on the Commission's occupational pensions committee to provide greater clarity on what it called "definitional differences" in how various member states interpret terms such as ‘cross-border activity' and ‘ring-fencing'.
Nevertheless, its message overall was positive, easing concerns of further regulatory changes.
But the loudest sigh of relief came from its statement that the much-debated Solvency II for pension funds is "not an appropriate course to pursue". While a comparable process of member protection for IORPs was still deemed necessary to ensure a level-playing field between countries, applying Solvency II to pension institutions was not the way forward.
The report acknowledged that there were "natural limits" in the European pensions directive because of substantive variations in regulatory requirements in the various member states that could spur regulatory arbitrage, and added that indications of this had recently emerged.
The report also found that the existing prudential frameworks in the European Economic Area (EEA), the grouping of the EU and Efta, were diverse. Differences related to complex technical aspects that in part reflected provisions in national social and labour law that may determine the content of the pension promise or set minimum requirements for such
issues as inflation protection, maximum discount rates, mortality assumptions or insolvency protection.
"These requirements influence the level of the technical provisions to be held by the IORP and the functioning of security mechanisms," it said.
The report appeared to be a departure from previous statements in favour of applying Solvency II to pension funds. After all, until now the topic ‘CEIOPS' guaranteed a vibrant discussion about the EU and where its pension regulation should go.
In the past the body has been criticised for its support for the application of Solvency II to pension funds. However, in its new reports, CEIOPS seems to have taken note of pressure from the pension industry.
In June Robin Ellison, the former chairman of the UK's National Association of Pension Funds (NAPF), said: "Their [CEIOPS] job is to make sure pan-European pensions can't happen, because they are very worried that you and I would chose a soft country to go to and get away from the regulators." He added that CEIOPS' role was to build a cartel against pan-European pensions.
Opposition from the European Federation of Retirement Provisions (EFRP) was particularly fierce. In November the EFRP argued that applying the Solvency II framework to pension funds could increase occupational scheme liabilities by up to 60%. Earlier, then-EFRP chairman Jaap Maassen had dubbed the regime a "devil in disguise" for pension funds.
And pressure to resolve the issue came in November when Peter Skinner, a member of the European Parliament's committee on economic and monetary affairs, warned that the Solvency II project needed to be finished this year, before the European parliamentary election in 2009.
And indications that CEIOPS was having second thoughts on Solvency II and IORPs came in November
when Klaas Knot, director of supervisory policy at the Dutch pension regulator DNB and a newly appointed member of CEIOPS managing board, said: "It is not being discussed that Solvency II, as such, will be applied to pension funds lock, stock and barrel."
Knot made his comments, despite the fact that the committee was setting up a steering committee to deal with solvency issues for pension funds.