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IORP review confirms pensions solvency complications

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  • IORP review confirms pensions solvency complications

EUROPE - Pension funds operating under Article 17 of the Institutions for Occupational Retirement Provision (IORP) rules would have to undergo significant overhaul were the EC to ever consider making IORPs adapt to Solvency II rules, suggest responses to the European Commission consultation on harmonisation of solvency rules.

Details of the 20-page feedback statement show there are very mixed opinions about whether IORPs following the principles of Article 17 should also follow Solvency II, and the divide of support towards applying the same solvency rules on IORPs is largely from member states and insurers where the insurance market dominates the pensions sector.

Respondents not just in the pensions sector but elsewhere argued having pensions funds operate under IORP does not create an unlevel-playing field with insurers and providers because IORPs are not-for-profit organisations and their governance structures mean they have no third-party shareholders.

Elsewhere within the findings, there was also some disagreement as to whether or not there should be a market-consistent method for measuring pension liabilities, especially if the rules were based on international accounting standards, as respondents felt this would create volatility within pensions valuations and "underling that there is a difference between regulatory and accounting requirements".

Establishing whether there ought to be a consistent way for measuring valuations seems to be an important topic, based on feedback from insurers, member states, pension funds, consultants and representative bodies, as some respondents said there was at least "some merit" in further harmonisation of solvency rules for IORPs operating cross-border.

More specifically, respondents noted the valuation of a pension in one country can look significantly different in another country because of the rules and methods applied, as well as the differing levels of information some pension members are given.

As a result, some respondents suggested four key areas which might merit harmonisation on a cross-border basis are: Valuation of assets and liabilities and…valuation of technical liabilities; Rules for the determination of regulatory own funds; Governance rules, and Transparency meant as information provided to both supervisors and beneficiaries.

The European Commission is currently reviewing some of the existing solvency rules applied to IORPs because of ongoing complaints about level playing fields cross-border, however, respondents said they were "doubtful that a fully harmonised approach would be feasible as long as member states are competent to specify the organisation of their pension system, the nature of pension promises and are substantially unconstrained in what they include within [Social and Labour Law - SLL]", especially as IORPs only form one pillar of a member state's pension provision.

Another key concern raised by many respondents concerning cross-border activity relates to funding levels, as many said the requirement for IORPs to be "fully funded at all time" was unviable and a key obstacle.

Other parties noted legal uncertainty could be generated by harmonising Solvency II-type rules to IORPs cross-border as prudential requirements embedded in SLL national frameworks are not governed by EU legislation, and where EU prudential requirements do exist, they allow for very different forms of implementation.

Article 17 of the directive refers to the previous solvency directive for insurers, Solvency I, as the precursor to Solvency II, and is adopted by a minority of pension fund vehicles as in most cases IORPs do not bear the full risk of managing pension assets but have some form of sponsor support.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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