The EU’s pension fund supervisor has published draft opinions on the supervisory reporting of costs and charges by pension funds and on the supervision of risk assessment by defined contribution (DC) schemes.
It is consulting on both opinions until 22 July.
The opinion on reporting of costs and charges sets out a generic classification of all costs to be reported to national supervisors, including templates. This is both for supervisors to collect information from IORPs and to assist pension funds to collect cost information from investment managers.
Principles for the compilation of the cost information are provided, including that the look-through principle be applied to also include indirect costs at the level of investment managers. The no-netting principle should also be applied.
Another principle set out is that national supervisors should expect IORPs to report the costs paid directly by sponsoring undertakings.
The opinion also provides guidance on the supervisory use of the cost data, with EIOPA saying that national supervisors should assess the efficiency of IORPs, affordability for sponsors, and the value for money offered to members and beneficiaries.
“The results of such benchmarking exercises should feed into the supervisory review process and the regular dialogue with the IORPs’ management boards,” EIOPA added.
The European supervisory authority said that although the opinion restricted itself to cost reporting to national supervisory authorities, more comparable and transparent cost data could potentially be used by EIOPA in the future.
DC risk management
The aim of the other opinion, according to EIOPA, is “to promote consistent supervisory practices by providing competent authorities with guidance on the supervision of risk management by IORPs providing DC schemes”.
In light of the ongoing shift from defined benefit to DC pension provision, “a risk-sensitive supervisory approach to DC risk management is necessary to ensure that risks borne by DC IORPs and members and beneficiaries are appropriately managed and supervised,” it said.
The opinion focussed on two aspects of DC risk management, namely the use of quantitative elements in operational risk management, and the use of projections of future retirement income in assessing long-term risks from the perspective of members and beneficiaries.
EIOPA said there was “no single algebraic formula or model which could capture overall operational risk” but that national supervisors should encourage DC pension funds to estimate the possible impact of operational risk of at least the activities performed internally.
“This can be done by means of own custom-made operational risk estimates or by using the standard formulas included in EIOPA’s common framework for risk assessment and transparency,” it said.
It also said pension funds “could consider the impact of operational risk on the account values of DC members in the short-term and projections of future retirement income in the long-term”.
According to the opinion, national supervisory authorities should expect DC pension funds to conduct long-term risk assessments by using projections of future retirement income.
It outlined several principles for this, for example that the projections be based on stochastic scenarios of asset returns. However, EIOPA acknowledged that stochastic scenario analysis is more demanding than a deterministic approach, and said that, “to ensure a risk-based and proportionate application of this opinion,” national supervisors could allow for deterministic return scenarios in projecting future retirement income.