Groupe expects changes to assumptions under IORP
The Groupe Consultatif Actuariel Européen says it expects to see "significant" changes in the way discount rates and other pension fund assumptions are determined under the occupational pension fund directive.
The Groupe, which represents European Union actuarial associations, has issued a 26-page study called ‘Minimum Technical Provisions for Defined Benefit Occupational Pensions in the EU, A summary of minimum funding requirements'. It's edited by Chinu Patel of Watson Wyatt.
The survey highlights certain types of schemes where it is not clear if and how Article 15 of the Institutions for Occupational Retirement Provision directive will apply.
"For example, in many countries where insurance is a common method for financing pensions, the sponsoring employer usually carries certain residual risks (for example, the risk of salary increases and some biometric risks)," the Groupe says.
"We found no evidence of any country that requires the sponsoring employer to pre-fund for some or all of these residual risks and therefore it is arguable whether they are exempt from Article 15.
"We expect to see significant changes in the way discount rates and other assumptions are determined as EU states begin to implement the IORP Directive."
While comprehensive information is not yet available on the way in which each country proposes to implement Article 15 of the Directive, there are signs that minimum technical provisions will in future be characterised by differing balances in member states between scheme collateral, regulatory powers and disclosure." Future surveys will monitor these changes.
The survey indicated that, prior to the implementation of the IORP directive, there were varying practices across EU countries on how the financial assumptions were determined
Fixed discount rates were prescribed in most countries (Belgium, Finland, Germany, Luxembourg, Netherlands and Portugal). A full set of assumptions (i.e. inflation, salary increases and discount rate) was applied in a minority of countries (Ireland, Spain, UK).
There was some flexibility in how certain assumptions were determined (Spain). Financial assumptions were selected by reference to prevailing market conditions only in Ireland and the UK. Elsewhere they did not change directly with movements in stock markets and other financial conditions, although there was evidence of an indirect link in at least one country (Germany) through the process of regulatory oversight.
In at least one country (Netherlands) the fixed discount rate made some implicit allowance for discretionary benefit increases.
The responses show two distinct groupings. There are two countries (UK and Ireland) where financial assumptions for minimum technical reserves were set by reference to market yields - and are thus capable of complying with Article 15.4(b) of the IORP directive. Then there are other countries where financial assumptions were prescribed as fixed rates without any direct link to stock market indices or yields - which thus may need to be modified to comply with the directive.