No definition of 'full funding'
It is issues such as tax laws, investments rules and the roles of pensions regulations that have been covered as the stumbling blocks to European pension funds. But a new and updated edition of a European report on retirement benefits and actuarial methods and assumptions by the Groupe Consultatif Actuariel Européen shows considerable variation in these across the EU.
While this is far from a new revelation, it has a bearing on the fundamental issue of converging Europe’s pension schemes. They are, after all, used to calculate funding levels and assets and liabilities. David Collinson, author of the report and a member of the Groupe Consultatif, delivered the findings in Brussels last month.
The Groupe Consultatif was established in 1978 to represent Europe’s actuaries but it now contributes to the EU’s legislative process- many of its suggestions were incorporated into the Third Life Directive back in the nineties.
One of the conclusions of its latest report is that, at a basic level, there is no common definition of full funding. This issue applies to the current pensions directive, in which funding levels have become an issue.
Says the report: “Under the recently proposed EU directive on pensions, pension plan members will receive very different levels of protection with regard to the extent to which their accrued benefits are matched by assets, dependent upon the country in which the pension plan is located and the type of pension plan.”
The report suggests that in the 18 countries it covers, there has been a certain convergence of approaches in the way in which multinationals make calculations, particularly those that apply IAS19. However, it adds that there are issues that need addressing for greater convergence and consistency.
First is the notion of acceptable funding approaches. At issue here is whether or not there should be a standard measure of the funded status of a pension plan. The example it gives is a projected unit approach.
Asset valuation methods also need to be considered. Here the question is whether using a range of approaches to value pension assets when calculating the funded status is acceptable or whether there should be a move to, for example, market values.
There is also the matter of what the report calls ‘economic assumption’. In some countries, a discount rate is specified by regulators while in others for the actuary is free to choose.
The introduction of the euro has also thrown up some new issues. Harmonisation of some of the key assumptions across countries using the euro is one issue. It also suggests that despite the convergence of economies using the euro, there are still some significant differences in common actuarial practice between these ‘euro’ countries.
Different demographic assumptions used across Europe can have a very significant effect on the valuation of pension liabilities and therefore on the level of security provided in respect of mature pension funds.
The report says that these differences arise not only from different actuarial approaches but also reflect the different types and methods of retirement provision, the extent of their development and the extent to which tax and supervisory authorities place restrictions on actuaries.
Further details about the Group Consultatif Actuarial European and the report are available on its website: www.gcactuaries.org