The European pension supervisor’s attempts to account for pension protection vehicles in its new holistic balance sheet (HBS) puts it at odds with current UK law, Eversheds has warned.
Francois Barker, head of pensions at the law firm, told IPE he welcomed the European Insurance and Occupational Pensions Authority’s (EIOPA) new consultation on the HBS, as it accepted that a ‘one-size-fits-all’ approach to valuation was not always possible.
However, he said some “oddities” remained within the six potential balance sheets outlined in the paper, particularly those that allowed pension funds to use the existence of a pension protection vehicle – such as the UK’s Pension Protection Fund (PPF) or the German Pensions-Sicherungs-Verein – as a way of addressing any funding shortfall.
“In terms of factoring in the pension protection schemes, the HBS would potentially put EIOPA in conflict with UK law that says you’re not really supposed to take account, as a trustee, of pension protection schemes in the background,” he said.
“If EIOPA, and by extension the Commission, come out and say you do have to factor in a pension protection mechanism as part of the HBS, that will create an interesting tension.”
The UK government granted the Pensions Regulator (TPR) the power to issue contribution notices and financial support directions in instances where a company ignores or fails to adequately fund defined benefit (DB) schemes.
This allowed the regulator to address the moral hazard of sponsors purposely letting underfunded schemes fall into the PPF.
Barker also raised concerns about the potential inclusion of sponsor support that could not be legally enforced – unlike the UK practice of parent company guarantees to fund deficits.
Several of the HBS proposals put forward by EIOPA considered how the legally unenforceable support could be included within the balance sheet.
The consultation concluded that it would have “little loss-absorbing capability” and could not be used a balancing item were solvency capital requirements (SCR) to be introduced, although such proposals were only part of the now-abandoned pillar I proposals of the revised IORP Directive.
Barker said the inclusion of legally unenforceable sponsor support would be “in conflict” with TPR’s previous pronouncements that trustees could only “count covenant support as having value if it’s legally enforceable”.
Despite welcoming EIOPA’s recognition within the new consultation paper of the “variety of jurisdictions” it oversees, Barker was nonetheless cautious about the process.
“There are risks in here, not just for the UK but any DB jurisdiction,” he said.
“That the insurance company methodology is even being given house room as a possibility – it’s only one of six – is a warning flag, and we should all react to it.”
Other UK commentators have previously welcomed the “pragmatic” approach displayed by EIOPA, but warned that they did not want to underplay the risk.