New Europe-wide risk-evaluation rules for pensions must be drafted before a revised IORP Directive passes into law, after EU member states rejected the idea of their later insertion by the European Insurance and Occupational Pensions Authority (EIOPA).
The member states also called for greater flexibility for cross-border pension provision and suggested paring down the previously detailed regulation for a universal pension benefit statement (PBS).
The new compromise draft of the Directive was drawn up in consultation with member states by the Italian government, which currently holds the rotating presidency of the Council of the EU.
The draft, discussed by member states at a meeting earlier this week, sees details of the risk evaluation for pensions (REP) significantly expanded – running nearly four pages compared with the initial draft’s one.
The new proposals outline that the REP should be undertaken at least every three years but retains wording that funds should also complete one “without delay” when the fund’s risk profile changes.
It further details how the REP should contain a profile of the fund’s longevity, market, credit, liquidity and “other material” risks.
However, the proposal that a qualitative assessment of climate change or resource risks should be part of the REP has been dropped, while a broader provision that all emerging risks “that could have an impact on the institution and its members and beneficiaries” has been included.
It is likely that the proposal for a more prescriptive REP within the legislative draft is to avoid the need for a later delegated act, which would allow the Commission to lay down the detail of the rules without European Parliament scrutiny.
As a result, the suggestion that a delegated act is required has been cut, alongside wording that the act would not seek to “impose additional funding requirements beyond those foreseen in this Directive”.
The wording was meant to assuage fears the act, on which EIOPA would advise the Commission, would impose capital requirements akin to those contained within Solvency II.
EIOPA has not been completely removed from the draft, with the final clause of the REP requirements saying the pension supervisor should work closely with its fellow European supervisors to ensure the consistency of any risk assessment guidelines.
Notably, the presidency’s proposals also remove requirements that cross-border IORPs be funded “at all times” – an attempt to make cross-border provision easier, as proposed in at least one draft of IORP II prior to publication in March.
Instead, the compromise draft now only requires full funding of liabilities when the cross-border activities commence, with permission for a recovery plan to be filed with the host state’s regulator in line with local requirements.
Theoretically, this could allow a cross-border vehicle to be established with a limited number of members, fully funded, while allowing for the later transfer of further members.
However, Mark Dowsey and Dave Roberts, consultants at Towers Watson in the UK, doubted that the cross-border wording would remain.
“We would be surprised if this particular element of the wording survives the legislative process,” they said.
Both noted that those previously opposed to more relaxed funding for cross-border vehicles would be likely to try to have the amendments removed.
The requirement for the PBS be two A4 pages has been replaced with a requirement that it be “written in a concise way”.
Dowsey and Roberts said the revised PBS allowed for greater member state discretion, while removing the requirement to disclose much of the detail that would have made a two-page statement difficult – such as past performance and investment data for defined contribution funds.
Despite the changes, they said the Directive should still achieve the Commission’s goals, without imposing unnecessary costs.
“The presidency’s proposals are, broadly, a better fit than the original for that objective,” they said.
“[We] don’t think it dilutes the potency of it – it takes out some of the proposals that are less workable, or appear initially to just impose additional and unnecessary costs.”
The changes tabled by the Italian presidency are only the first step in agreeing a final draft of the IORP Directive, with several more revisions likely.
As a result, the member states are unlikely to settle on a final draft to present to the European Parliament before Latvia assumes the six-month rotating presidency in January 2015.