EIOPA risk-assessment proposal 'least worst option'
The UK pension association has applauded what it described as the European Insurance and Occupational Pensions Authority (EIOPA) ending its work on solvency for pensions but, like others in the European pension industry, bemoaned its recommendation for a common risk assessment and reporting regime.
In an opinion paper, EIOPA today recommended the introduction of a common framework for risk assessment and transparency for defined benefit (DB) occupational pension schemes.
The framework should be incorporated into the directive for Institutions for Occupational Retirement Provision (IORPs), although EIOPA said it was not urging for this as part of the move to a revised IORP Directive (IORP II), currently being negotiated in trilogue.
It will be up to European legislators to decide on what to do with EIOPA’s recommendations, which it provided on its own initiative rather than on request from the European Parliament, Council or Commission.
The previous European Commission, under Michel Barnier, put on hold work on solvency of pension funds.
In its opinion today, EIOPA held back from recommending harmonised capital or funding rules, saying the introduction of a one-size-fits-all framework in this context would not be “effective” in allowing heterogeneous IORP sectors across Europe to meet the different challenges they are facing.
The UK’s Pensions and Lifetime Savings Association (PLSA) hailed EIOPA’s decision.
Joanne Segars, chief executive at the PLSA, said: “EIOPA’s decision to end its work on solvency marks an important development in the long-running debate about a solvency-based funding regime for pensions.
“It is good news for pension schemes in the UK and Europe, and [it’s] a result our member pension schemes have campaigned tirelessly to reach.”
However, it was critical of EIOPA’s proposal for a new reporting regime because of the expense and the confusion it would cause, and without delivering any benefit to scheme members.
EIOPA acknowledged that “significant” costs could be incurred in complying with the proposed framework but said that, with “a proportionate application”, the benefits would outweigh the costs.
Segars said there were “more pressing priorities for EIOPA to pursue” and that EIOPA should also “go further and drop the Holistic Balance Sheet altogether”.
The Holistic Balance Sheet (HBS) is the term EIOPA had used for its concept of a standardised valuation of DB pension funds’ asset and liabilities that would capture security and benefit adjustment mechanisms such as sponsor support and any possible benefit reductions, all on a market-consistent basis.
EIOPA has dropped the HBS term, however, replacing it with ‘common framework balance sheet’.
It is also using the term ‘standardised risk assessment’ instead of ‘solvency capital requirement’.
Least worst option
The common framework EIOPA has proposed consists of a “market-consistent balance sheet” and a standardised risk assessment.
Under the former, EIOPA said, occupational pension schemes should use a basic risk-free interest rate to value liabilities and “recognise all available security and benefit adjustment mechanisms”, including sponsor support, pension protection schemes, conditional and discretionary benefits and benefit reduction mechanisms.
The risk assessment would be on the basis of this balance sheet, thereby showing how the various adjustment mechanisms can absorb stresses and reduce IORPs’ deficits.
Rowan Harris, actuary at UK firm Barnett Waddingham, said EIOPA had gone for “what might be described as the ‘least worst’ option”.
“Many schemes under pressure to keep running costs low would have preferred EIOPA to ditch this concept altogether,” he said, adding that there were better risk-management tools for them than the HBS.
“The case for a common framework, above and beyond this, at European level has not been adequately made,” he said.
Others were more positive about EIOPA’s proposal.
Philip Shier, senior actuary at Aon Hewitt in Dublin and the former chair of EIOPA’s occupational pensions stakeholder group (OPSG), said he supported a “robust approach” to risk management, measurement and mitigation.
“There are difficulties in getting a consistent approach because pensions are different across Europe, but most of the approach in the EIOPA paper seems good,” he told IPE in an initial reaction.
“The issues are to what extent [the risk assessment] gets used and creates additional cost. It is much too early to say how this might filter through into action.”
Barnett Waddingham’s Harris, meanwhile, raised the Brexit issue, noting that, even if European legislators decide to take up EIOPA’s recommendation, UK pension schemes may not be subject to any future regulation on the matter.