Divisions surface over Solvency II
A remark made by a French government official last month has resurrected the row about the application of Solvency II to pension funds. What has re-emerged is the insurance lobby's apparent support for rules requiring all types of pension plan to manage their solvency within one legal framework. Unsurprisingly, pension funds confirm that the drive to develop a competitive level-playing field would seriously damage existing schemes and force their closure.
Behind-the-scenes talk suggests it is the French insurance lobby that keeps insisting on the need for Solvency II-type legislation on pension plans. Yet the move by Fabrice Pesin, deputy assistant secretary and head of the insurance division of the French Treasury, to say so publicly is understood to have angered pensions experts on his home turf. He said: "It is a question of policyholder protection [and] of ensuring a level-playing field as there are some pension funds that want to export their product. It is impossible for us as politicians to say I'm open to some products with old rules and Solvency I protection."
Simultaneously, Towers Perrin-partner Falco Valkenburg, also chairman of the investment and financial risk committee at the Groupe Consultatief Actuariel Européen, championed a single framework for the entire financial sector at a conference in Rotterdam. He argued a single framework would be logical, from a technical point of view.
Valkenburg made his case for more risk management among pension funds, claiming they should "look at their position almost daily; not to make daily adjustments, but to test how sensitive the scheme is to changes on the financial markets, and how effective the steering mechanisms are".
Tackling the question of required solvency buffers, he noted that Dutch schemes, in particular, can adjust indexation and contribution rates. In much the same way, experts in other member states argue schemes can adjust benefits paid or contribution rates to tackle solvency concerns.
According to Valkenburg the entire Solvency II framework does not need adjusting just because different scenarios require different buffers.
But pensions officials still feel differently. Peter Borgdorff, director at the €88bn Dutch sector-fund for the healthcare industry (PFZW), is not against a joint framework, but questions whether it can be achieved given each country's system is different and the solvency steering mechanisms applied will be "marginalised" leaving schemes "faced with very high buffers".
A few days later in Paris, Lars Rohde, chief executive of the DKK349.3bn (€46.8bn) Danish ATP pension fund, defended calls for Solvency II requirements to be applied to pension funds, arguing it is a way of making it clear "risk is in short supply".
His remarks followed a presentation by Jaap Maassen, first vice-chairman of the European Forum for Retirement Provision (EFRP), who argued against applying a solvency regime for insurer and pension funds combined and reiterated his ‘devil in disguise' claim. Maassen acknowledges advantages to a risk-based framework for pensions which embrace market valuation, but feels a one-year solvency requirement is not the best solution for risk-based pension funds.
Rohde called Maassen's remarks "provocative", adding: "If you, for the sake of argument, disregard any kind of regulation, what would the asset allocation of pension funds look like if we only take into account the way our stakeholders want us to behave?"
Nigel Peaple, director of policy at the UK's National Association of Pension Funds, noted: "It is of great concern that French government officials and others, despite all the evidence, continue to pursue an agenda which would lead to the rapid closure of salary-related pension schemes across many parts of Europe, including the UK."
Germany's pension vehicle federation (aba) noted in June that pension providers could yet see an impact from Solvency II through the IORP Directive, even if the European Commission makes no explicit link.
A letter addressed to several MEPs noted the IORP Directive makes reference to the current insurance regime Solvency I in a paragraph about the calculation of the minimum level of equity capital for pension vehicles.
"The passing of Solvency II might therefore automatically link the IORP directive to Solvency II," pointed out Klaus Stiefermann, head of aba.
"An amendment to the current Solvency II draft is therefore necessary to ensure all Solvency I references in the IORP directive remain unchanged and that the new regulations under Solvency II are not applied to occupational pension vehicles," said Stiefermann.
With so much noise from the pension fund sector against the need for further solvency-based regulatory measures, the question is why this debate still continues if, competitive advantage aside, many experts argue there are sufficient rules in place to protect members.
Perhaps the answer lies in whether employers and sponsors will remain willing to finance existing DB-style pension arrangements.