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'Fully funded' doubts

The European pensions directive’s requirement that Institutions for Retirement Provision (IORPs) be “fully funded” does not mean exactly that, Irish pensions regulator Anne Maher told the IPE Multipensions Conference in Amsterdam.
The European Commission has said at a meeting that it is happy that a pension fund operating cross border could introduce a recovery plan when needed, said Maher, who is chief executive of the Pensions Board.
“But at the point that the fund moved cross border it had to be fully funded,” she added. Should a fund later fall below the fully funded level, it could then introduce a recovery plan.
Maher said that in her view the fully funded requirement could not be absolute as it would be impossible for any defined benefit scheme to operate cross border with the level of funding that would be required to be fully funded.
Maher said she had asked the Commission whether a 10-year period would be acceptable as a recovery period, in line with that allowed under Irish rules for local pension plans. The EC had not reacted negatively to this question.
The Irish authorities have not decided what to do on this point, she added. They could allow 10 years for IORPs but it could be less.
She also pointed out that the Commission might not have the final say about the interpretation of the directive, which could be decided by the European Court of Justice.
Maher also reiterated her objections to the Solvency II requirement for insurance companies to apply to pension funds: “I think it could be the death note of DB schemes.” She felt the EC could have a different template for pension funds under Solvency II requirements.
The pensions directive should not be changed soon, according to Mihaly Erdos, chair person of the CEIOPS occupational pensions committee and deputy managing director of the Hungarian Financial Supervisory Authority. “This is not necessary in my view.”
Erdos was responding to calls to amend the directive coming from the European funds group lobby EFAMA and the CEA, representing the insurance industry.
It was only after the directive had been implemented for some time and it could be seen how well it was working. “Then we can change it, perhaps after three to five years.”
The main aim of the pensions committee of CIEOPS was to develop the ‘Budapest protocols’ for occupational pensions, which are separate to those applying to insurance.
The first draft of this had been produced in September 2004, he pointed out. This was followed by the first public consultation in February last year, which took three months.
During the summer, discussions took place on the comments that had been received.
“On October 28, the second public consultation on the revised document started,” he said. This would be followed by a discussion on the comments, with a final version of the protocols later in 2006. “Is this process too long?” He contrasted it with the Protocols for the insurance industry which took 10 years. Erdos attributed this progress to remarkable work by the pensions committee.
The loss of key people is the main reason why fund managers are fired by the Norwegian Petroleum Fund, according to its chief executive Knut Kjær. “It is not performance,” he told the conference. Talented managers were leaving traditional active managers, often to start hedge funds.
The turnover in the petroleum fund’s equity managers was around 10% per annum, he added. Altogether the fund had 68 different internally and externally run mandates, currently 40% of which were run by external managers.
He said that the overall cost of fund management came to around 0.1%, or 10 basis points, of which internal costs were four basis points and external management costs 29 basis points, including performance fees.
The fund does not currently invest in alternative asset classes, such as real estate and private equity, he said. “But hedge funds are not an asset class, and we can use hedge funds as part of our investment today.”
The Norwegian Central Bank would review the question of real estate and private equity later, Kjær said. Currently the fund stands at $230bn (€195bn), and is growing rapidly, he added.


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