EUROPE – The European Insurance and Occupational Pensions Authority (EIOPA) has warned against a “worrying” drop in IORP funding, particularly for larger defined benefit (DB) schemes in the UK and the Netherlands, and repeated its call to implement policies based on Solvency II.
In its half-year financial stability report, the authority argued that the risks to financial stability for insurers and occupational pensions remained high, notwithstanding coordinated political initiatives, actions taken by the European Central Bank and improving financial markets.
“This is particularly pertinent when considering the increasing likelihood of long-lasting low interest rates in a number of global economies, along with capital market volatility,” it said.
EIOPA added that, even though profitability remains “relatively stable” for insurers and Solvency I capital ratios are still at “comfortable” levels, this should not give rise to complacency, since Solvency I is neither market nor credit-risk sensitive.
“It does not allow supervisors to have a full picture of the underlying market and credit risks to which undertakings are exposed,” EIOPA said.
The authority also voiced strong concern regarding IORPs, which show a “worrying” decrease in funding.
According to EIOPA’s report, in the UK alone, statistics show funding levels below 80%.
Additionally, the authority noted that, in the Netherlands, where funding levels have dropped below 100%, national supervisors’ recovery plans have come force, giving pension funds one or two additional years to lift funding ratios to at least 105%.
EIOPA said this two-year reprieve had been used by most funds, and was unlikely to be extended.
It acknowledged that many funds would now have to cut pension benefits as a consequence, but it pointed out that these cuts would be spread over several years.
“A key driver behind these developments is the low-yield environment, since low discount rates increase the current market value of the liabilities,” it said.
“Taking a longer-term, forward-looking perspective, improved longevity of pensioners will also weigh negatively on funding levels in the future.”
Gabriel Bernardino, chairman at EIOPA, went on to say that, given ongoing financial uncertainty, maintaining a “clear” perspective on these risks was difficult in a Solvency I environment.
“In this context,” he said, “a clear and realistic timetable for the implementation of Solvency II would be a very serious contribution to the financial stability work in Europe.”