EUROPE - The European Commission has issued a consultation paper asking the fundamental, yet controversial, questions concerning the competition and cost implications of requiring pension funds to meet the same requirements as insurers under the Solvency II directive.

A row about the affect this specific piece of legislation could have on pensions has been raging for some time between governments, insurance companies and the pensions funds it could affect, as insurance-led regimes have argued pension funds are given an advantage as Article 17 of the Institutions for Occupational Retirement Provision means they do not have to meet the same solvency requirements under Solvency II as life insurance firms providing pensions plans.

Similarly, representatives of pension funds have argued the potential liabilities on pension funds could rise by 40-60%, and force many sponsors to close their schemes to new members in order to limit the potential cost, if the link between section 2 of Article 17 has to be transferred to the new Solvency II insurance directive, rather than recognising its link with the 'old' Solvency I directive is sufficient.

The EC has now called on all interested parties of the European financial services industry to provide their views as a result, but has stressed in the consultation no decision either way has been made on whether Institutions for Occupational Retirement Provisions (IORPs) will be required to comply with Article 17.

This is perhaps especially important as Charley McCreevy, commissioner for the Internal Markets & Services DG, said earlier this year it was unlikely the EC would be willing to introduce rules which could harm the funded status of defined benefit schemes. (See earlier IPE story: EC unlikely to risk pensions closure with Solvency II)

That argument has been somewhat reiterated in this latest paper, as the consultation states: "The Commission will be particularly concerned that a careful balance is struck between the protection of future pensioners and the cost of providing occupational retirement benefits to the sponsoring undertaking."

The paper was released last week but has only just become accessible on the European Commission's website, and is understood to have been unveiled ahead of Charley McCreevy's session in front of the European Parliament later this week.

The 10-page consultation includes many and very specific questions, but among them asks:

Do you believe that prevailing solvency rules for IORPs subject to Article 17 provide adequate protection relative to the objective of safeguarding pension beneficiaries' claims at reasonable cost for the sponsoring undertakings? Have there been shortcomings or flaws identified in the prevailing solvency rules for IORPs subject to Article 17? If yes, please specify. What could constitute the main challenges lying ahead? To what extent do compulsory versus voluntary membership in pension schemes have a different impact on the overall outcome of solvency rules and in which case(s) are problems likely to arise in the future? To what extent do the solvency rules prevailing today in the different Member States need to differ for single-employer or multi-employer IORPs subject to Article 17? Do you anticipate competitive distortions emanating from the application of different solvency regimes between insurance companies and IORPs subject to Article 17? Do you have any evidence of such competitive distortions (as mentioned in the previous sub-question) existing already? What would be the likely impact of applying Solvency II (or similar solvency rules) to IORPs subject to Article 17? What would be the impact on the future provision of defined benefit schemes and the risk of closing down existing schemes? What would be costs and benefits of this? In case a Solvency II-type regime were to be applied to IORPs subject to Article 17, which elements would need to be adjusted to take account of the specificities of the institutional set-up in which that IORP operate? Do you think that regulatory arbitrage and/or supervisory competition due to differences in the treatment of IORPs operating on a crossborder basis could ultimately be in the interest of pension beneficiaries or sponsoring undertakings or do you think that this may ultimately be harmful?

In the preparatory stages of the Solvency II proposal, the EC decided to "carve out" IORPs from the scope of Solvency II because there was a lack of solid evidence at the time about the potential implications these new solvency rules could have on IORPs subject to Article 17.

Fresh evidence was presented to the EC earlier this year, when CEIOPS suggested any application of Solvency II requirements on IORPs could have a detrimental affect. (See earlier IPE story: CEIOPS admits Solvency II ‘inappropriate' for pensions)

The timing of the consultation is also especially interesting, as the paper only looks at one element of the Solvency II directive but a series of fresh amendments to the directive were presented by various parties by the 1 July deadline which could still require IORPs to apply the rules, even if Article 17 was not considered to be appropriate for IORPs.

Both the Dutch pensions fund representative body (VB) and the European Federation of Retirement Provision (EFRP) have presented papers for the perusal of European Parliament MPs which point out several of these amendments would imply Solvency II to be applied even if Article 17 - which sets out the solvency requirements of insurers providing pension payouts - were not applied to IORPs.

Just as importantly, the EFRP document seen by IPE claims IORPs would be seriously disadvantaged if they were required to comply with the amendments presented for Solvency II as they had no input in the preliminary stages with Solvency II was being drawn up.

Further information and analysis of these developments will be provided tomorrow on IPE.com.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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