EUROPE - The design and investment scope of defined contribution (DC) funds should not be determined by the European Commission through its review of the IORP directive, Mercer has said.
The warning comes as numerous submissions to the review of the IORP directive predicted growth in the DC market - a result of proposed solvency requirements for defined benefit (DB) schemes that critics have said would make the vehicles too expensive to maintain.
In its submission to the European Insurance and Occupational Pensions Authority (EIOPA), Mercer said that while the "overarching objectives" of both scheme types were the same - namely to guarantee pension benefits - it was important to realise the differing approaches used by each due to DC schemes' approach to risk-sharing.
"In particular," the consultancy said, "we do not think the directive is the place for directing DC IORPs towards, for example, particular designs of default fund."
Noting that the DC investment approach was still evolving and that directives were not reviewed "frequently", it predicted that laying down investment guidelines would cause problems as the market developed.
"There is a risk that DC schemes would be prevented from taking advantage of new investment products that could provide better targeting or security for members, just because the wording in the directive does not accommodate their structure," it said.
In a separate submission, the UK's Standard Life rejected the suggestion that DC pension funds should be subject to any capital requirements to offset investment risk.
It said that while it was usually "straightforward" to identify operational risk, it was harder to quantify the impact of such risk.
"Focusing proactively on prevention rather than a subjective quantification, and a resulting cash strain on the sponsor, would be more appropriate," it said.
Mercer acknowledged that it might be "sensible" to mandate schemes to hold reserves for the short term to address administrative costs, but it opposed any risk-based buffer.
"However," it added, "where the investment risks are borne by members, the only other operational risk the members should face that could affect them financially is fraud."
Addressing the same point, Aon Hewitt warned that introducing such risk buffers would lead to inconsistencies between trust and contract-based DC funds.
It suggested that if capital requirements were introduced, these could be offset by calculating the value of the employer covenant.
But it said that the cost of such a calculation would likely be "disproportionate" to any gain.
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