Towers Watson’s Mark Dowsey offers some rather qualified praise for EIOPA’s efforts to date
I’ve read recent IPE articles quoting the European Insurance and Occupational Pensions Authority (EIOPA) chairman, Gabriel Bernardino, with great interest. Two leapt out at me, as the titles did not seem to accord with my experience – HBS best way to grow cross-border schemes, says EIOPA and Interview, Gabriel Bernardino: We are listening.
I have not heard anyone argue, with the exception of some within the European Commission, that the introduction of the holistic balance sheet (HBS) will lead to an increase in the number of cross-border pension funds. Moreover, in a speech in June 2012, Bernardino presented a slide that showed stakeholders’ views as to the obstacles to cross-border activity. The ‘full funding’ requirement ranked only fourth – with social and labour law, tax regimes and even lack of demand outweighing the full funding issue.
I would not deny that the inclusion of “fully funded at all times” in the first IORP Directive is a hindrance to the consolidation of defined benefit (DB) pension funds. Such consolidation is attractive, in particular to multi-national companies. However, the conclusion that this would be solved by introducing the HBS is wrong for the reason set out below.
If an EU-wide HBS-based supervisory regime sought to drive capital requirements substantially in excess of those currently applicable through EU member states’ implementation of the 2003 IORP Directive, the natural result would be (even) fewer sponsors willing to provide DB pensions altogether. Not only would this kill off any cross-border activity, it would also reduce existing domestic provision. Incidentally, it would almost certainly crush the life out of any nascent “shared risk” arrangements in the UK, in much the same way as the mere “threat” of increased capital requirements has spurred sponsors to call into question the level of their existing promises.
By contrast, if use of the HBS were confined to a risk management tool for those managing IORPs and/or national supervisors, then EIOPA envisages that the “fully funded requirement” will remain. In this case, the HBS would not help grow cross-border schemes. The best that can be said is that it would be no worse than at present.
EIOPA: The listening supervisor
Seasoned followers of EIOPA’s activities – not just for pension funds but also Solvency II for insurers – may, like me, find themselves struggling to equate Bernardino’s “we have listened, engaged and compromised” statements with past experience. Rarely have so many traditionally disparate voices been united in calling for an end to the project of seeking to impose an EU-wide solvency standard on pensions. In 2012-13, Business Europe, the European Trade Union Congress, PensionsEurope and other industry groups stated that solvency “harmonisation plans would have negative effects on the existence and adequacy of occupational pensions and the resources available for company investments in growth and jobs”. Yet EIOPA continues to push for just such an objective.
As mentioned above, insurers have also experienced EIOPA’s ‘listening’ ways. In 2013, EIOPA undertook public consultations on proposals for “guidelines on the system of governance” and the “forward looking assessment of own risks”. In its final reports, EIOPA wrote: “The … regular stress-testing is another issue that respondents object to” but concluded that “stress tests and scenario analyses do, in EIOPA’s view, … determine how exposed the undertaking is to certain risks”. Similarly, despite the development of an “own set of key risk indicators” being “among the most opposed requirements”, EIOPA decided that “key risk indicators are an important monitoring tool”. Evidence of cases where EIOPA has listened, engaged and compromised is, in my view, rather more difficult to find.
In praise of EIOPA
In light of the above, you may be puzzled by the title of this article. Well, despite the foregoing, EIOPA’s work on the first quantitative impact study and the proposal for the HBS has been a useful contribution to the debate on suitable risk-management and governance tools for pension funds providing defined benefits. My praise is in anticipation of EIOPA truly listening to stakeholders in future and deciding that its contribution to the debate is sufficient and that national supervisors and individual member states can decide how best to take matters from here.
Mark Dowsey is senior consultant at Towers Watson in its UK office, focusing on pension regulatory issues across the EU