The inclusion of insurance industry language on contracts within the European Insurance and Occupational Pensions Authority’s (EIOPA) recent balance sheet consultation is “unfortunate” and fails to take account of a sponsor’s ability to terminate accrual, according to stakeholders advising the supervisor.

In its recent consultation on the holistic balance sheet (HBS), EIOPA asked whether the term ‘contract’ could be applied to IORPs, echoing the term’s use to describe often fixed-term agreements between insurers and customers.

However, the supervisor’s Occupational Stakeholder Group (OPSG) took issue with the use of ‘contract boundaries’ – which within the insurance industry requires reserves to be held against future benefits – as it argued a pension fund’s contract would only run in step with the accrual of future benefits.  

Philip Shier, member of the OPSG and senior consultant at Aon Hewitt in Dublin, said the use of the terminology was “very unfortunate”.

He said defined benefit (DB) funds in the UK and Ireland could see its sponsor decide to close the fund to future accrual.  “That throws a different light on the need to reserve for future accrual, which would be the way it would be done in insurance contracts.

“For a pension where the employer or the IORP can, effectively, unilaterally cease the accrual of benefits at a point in time, then the contact boundaries should really be accrued benefits, because future service benefits aren’t necessarily going to be provided.

“And if they are, they are going to be funded by future contributions.”

The actuary said that any future contributions would be set by a scheme’s actuary to cover the future benefit accrual.

In its preliminary response to the HBS consultation, the OPSG said that contract boundaries should be defined “on accrual of future benefit entitlements”.

In the consultation, EIOPA appeared to accept that the terms ‘contract’ and ‘boundary’ were unsuitable for use within the pensions market, noting that the latter term referred to a fixed point in time when used by insurance companies.