The Swedish government has announced details of a new pension framework, imposing capital requirements on the country’s pension institutions that exceed the revised IORP Directive it is meant to emulate.
The rules, which will take effect from 2016, follow 2011’s decision to phase out the previous regime for pension institutions (UFL) and aim to improve corporate governance and risk management.
The stated aim of the review, chaired by Tord Gransbo, is to give companies a clear choice between offering pensions through a vehicle regulated under domestic insurance or through occupational pensions law.
According to the final, 848-page report, presented to the government today, simply applying the same principles that would apply to insurance companies under Solvency II would have not been the right approach to pursue.
Instead, newly proposed pension institutions should be subject to three capital requirements and hold capital equal to the highest of the three requirements – either a flat-rate capital rate similar to the current buffer requirements, a risk-based capital buffer or a guarantee-based requirement.
The committee responsible for the final report suggested the risk-based capital requirement would take into account the investment risk of individual asset classes and was “intended to provide incentives for good risk management”.
It also said a breach of the risk-based capital rules would be regarded as less severe than the flat-rate measure, as the latter would be viewed as pension institutions being in breach of the IORP Directive.
The institutions will also be offered leeway to account for capital shortfalls under the risk-based requirement if a third party is able to provide additional funding to shore up its position.