EUROPE – The implementation of the European directive on occupational pensions could lead to a change in the way discount rates are determined, according to the European actuarial consultative group.
“We expect to see significant changes in the way discount rates and other assumptions are determined as EU states begin to implement the IORP directive,” the Groupe Consultatif Actuariel Européen said.
The directive on Institutions of Occupational Retirement Provision, commonly known as the European pensions directive, is set to be implemented by member states by September 23.
The Groupe has put together a 22-page report on the minimum technical provisions for defined benefit occupational pensions in the European Union which summarises the funding requirements before the implementation of the directive.
It found that comparing pension discount rates is “not sufficient” to indicate the strength of technical provisions in the run up to the directive.
“The principal conclusion from this survey is that a comparison of discount rates is not sufficient to give an indication of the strength or consistency of reserving for technical provisions,” the report stated.
The report was put together by Watson Wyatt's Chinu Patel for the Groupe’s pensions committee.
The Groupe said there are several factors which govern the level of technical provisions. These included: the type of benefit promise, reserving method, scheme design, allowances for expenses and solvency margins and the full range of financial assumptions.
The Groupe found that most EU states have a fixed discount rate, which varies from 2.7-6%, with only two countries linking to market conditions.
“These results indicate a very wide variation in technical provisions between different countries,” the Groupe added.
And it found that there are certain types of schemes where it is “not clear” if article 15 of the directive, which relates to technical provisions will apply.
An example was in France where employer-sponsored DB schemes do not have to be pre-funded and therefore were arguably excluded from the requirements of the Article 15. Likewise for book-reserve schemes.
And it said that in many countries where insurance is a common way to finance pensions, the sponsoring employer usually carries certain residual risks such as those covering salary increases and some biometric risks.
“We found no evidence of any country that requires the sponsoring employer to pre-fund for some or all of these residual risks and therefore it is arguable whether they are exempt from Article 15.”