EUROPE - A clear distinction between past and future accruals should be made before applying solvency measures to cross-border pension funds, as more rigorous rules would be "financially unsustainable", according to Jonathan Faull, director general of internal markets and services at the European Commission.
In his closing remarks at a recent public hearing on the revised directive on Institutions for Occupational Retirement Provision (IORP) in Brussels, Faull warned that the past "could not be ignored" for defined benefit (DB) pension schemes.
"Pension promises have been delivered in a manner that, for different reasons, has undervalued the real cost of the pension promise," he said.
"If we were to apply more rigorous rules to the back book of the pension funds, this would most likely be financially unsustainable."
Faull said a solution to this problem had to be found before implementing any risk-based solvency rules for IORPs.
He also pointed out that many companies have moved away from DB plans towards defined contribution (DC) schemes.
"Undertakings have clearly realised they can no longer afford defined pension promises, as the returns on investments go down and people live longer, which of course is a very positive development, but which unfortunately results in higher liabilities and thus higher costs for occupational pension funds and rising costs for health services," he said.
Faull also said hybrid schemes that "spread the risks" among the social partners should be explored.
Pensions experts have recently argued that the capital requirements proposed under the new IORP regulation would be a cost burden on company sponsors, and that the directive should focus solely on cross-border activities.
A recent report published by JP Morgan Asset Management estimated that the cost to pension funds would increase significantly.
It estimated that new Solvency II-type requirements could force UK schemes to increase funding by as much as £600bn (€719bn).
JPMAM also argued that the increased governance and reporting requirements would place an additional burden on DB pension schemes.