The EU’s pensions watchdog has issued new guidance on how national supervisors should police pension costs and defined contribution (DC) risk management, despite several objections from lobby groups at the draft stage.
Regarding the first of the two opinions published on Thursday – on the supervisory reporting of costs and charges by Institutions for Occupational Retirement Provisions (IORPs) – the European Insurance and Occupational Pensions Authority (EIOPA) said such fees could have a substantial cumulative effect.
A 1% increase in costs could have a 20% impact on the amount of pension received, the Frankfurt-based EU authority said.
“Hence, in order to protect members and beneficiaries, a transparent and comprehensive view of all costs and charges is essential for IORPs, social partners and supervisors,” it said.
The opinion provides a classification of costs to be reported to national supervisors and introduces practical guidance for supervisors and IORPs – complete with reporting templates – on how to collect data, EIOPA said.
As well as laying out the principles for compiling costs data, the authority said the opinion also stipulated that not only direct but also indirect costs incurred by asset managers and investment funds should be reported.
It also said national supervisors should assess the cost efficiency of IORPs, the affordability for sponsors and the value for money offered to members and beneficiaries.
“The outcomes of the comparative analysis should be considered within the supervisory review process, including in the dialogues with the IORPs’ management boards,” EIOPA said.
In responses to this opinion at its draft stage earlier this year, industry umbrella groups PensionsEurope and InsuranceEurope both stressed the minimum harmonisation approach that the IORP Directive took, with the former saying EIOPA had to respect the heterogeneity of this sector.
In the second opinion EIOPA published on Thursday, on the risk assessment of IORPs providing DC schemes, the agency said it was issuing guidance on two aspects of risk management by DC IORPs in order to foster consistent supervisory practice.
“Firstly, the opinion calls for a greater use of quantitative elements when managing operational risks, supplementing EIOPA’s existing opinion,” it said.
Secondly, EIOPA said, it expected DC IORPs to conduct long-term risk assessments by using projections of members’ future retirement income, comparing the results with the established risk tolerance of the members and beneficiaries, and – as appropriate – considering the IORP’s investment strategies.
In the consultation earlier this year, EIOPA’s Occupational Pensions Stakeholder Group (OPSG), which includes representatives from pension funds, lobby groups and academics, said the IORP II Directive did not require a quantitative assessment of the operational risk, so an opinion from EIOPA on the topic went beyond the directive’s scope.
EIOPA’s new opinion on DC risk assessment also states that as well as DC schemes, supervisory authorities should apply the guidance to “other pension schemes where members and beneficiaries bear material risks, taking an approach proportional to the risks”.
It added: “For instance, this could be the case, for pension schemes where the share of assets for which members and beneficiaries bear investment risk is, based on analysis of the CA [competent authority], material in relation to the guarantees provided”.
When EIOPA canvassed responses in its consultation to the scope of application of the DC-related opinion being extended in this way, the OPSG, PensionsEurope and InsuranceEurope all opposed it.