Pension experts reject need for further cross-border ring-fencing measures
EUROPE - Pension experts across Europe have raised concerns about the possible introduction of new ring-fencing requirements for cross-border pension funds.
Responding to the European Insurance and Occupational Pensions Authority's (EIOPA) Call for Advice on the directive on Institutions for Occupational Retirement Provision (IORP), several pension fund associations rejected the notion that additional measures would increase protection.
The National Association of Pension Funds (NAPF) said new measures were largely unnecessary, pointing out that, in the UK, the Pensions Regulator already supports such requirements.
"This protection is already provided by Article 8 of the current IORP directive," it said in a statement. "In the UK, this legislative requirement is robustly supported by the role of the Pensions Regulator, which would intervene if a sponsoring employer were to breach these clear requirements."
German pension fund association largely AbA echoed the NAPF's concerns, yet it acknowledged that the practice might be necessary at times in order to comply with social and labour laws.
"Ring-fencing can stand in the way of achieving efficiencies through scale economies and inter- as well as intra-generational risk sharing, which we see as core objectives of IORPs," it said.
But the group said too much attention had been paid to member protection at the expense efficient management techniques.
"In a system where beneficiaries are protected by social and labour law, the security level of the IORP is secondary to the objective of facilitating efficient management," it said.
The AbA said member states should be given the option of introducing ring-fencing, but should not be required to do so.
It also called on EIOPA to clarify exactly what it meant by the term.
The British Private Equity & Venture Capital Association, which also called for more clarification of the term, said: "We note that the interaction of ring-fencing options with the requirement that IORPs undertaking cross-border activity be fully funded at all times is not dealt within sufficient clarity in the response."
It said it was unclear whether 'fully funded' was defined at the level of the IORP or at the level of each ring-fenced section within the IORP.
It added it was unclear what this meant for members' reliance on surpluses or deficits within the IORP, and the potential 'transfer' of assets within the IORP.
Meanwhile, the three associations argued that the 'holistic balance sheet' (HBS) proposal set out by EIOPA was "inflexible" and "unnecessary", echoing sentiments expressed by others in the industry earlier this week.
The NAPF said: "With such a diversity of pension systems across the EU's 27 member states, it is impossible to find a single regulatory system that would work well in every member state.
"It would be better to retain the high-level framework provided by the current IORP directive, which allows member states to develop funding regimes that suit their own patterns of pension provisions."
The NAPF recommended putting more emphasis on the use of Own Risk and Solvency Assessments (ORSAs), arguing that such a model could provide a more flexible, qualitative approach to assessing pensions security.
It nonetheless insisted that the ORSA should be seen as an alternative to the HBS and not as a complement or an addition to it.
However, the BVCA, which agreed that the ORSA could be suitable for IORPs, doubted that such a requirement could be transcribed into the new directive.
The NAPF finally expressed strong concerns over how certain components of the HBS might be valued.
"It seems almost certain that the new approach would dramatically raise funding requirements in a manner that would undermine pension provision, rather than strengthen it," it said.
According to the pension fund association, UK businesses would have to inject at least £300bn (€360bn) into defined benefit pensions if Solvency II capital requirements were introduced within the revised IORP directive, leading to the closure of more final salary pensions in the private sector.
Commenting on the Call for Advice, Raj Mody, head of PwC's pensions group, also claimed that EU proposals to adapt such capital requirements to pension schemes could destroy not only defined benefit schemes but any occupational pension provision.
"The additional costs for companies would ultimately be borne by individual savers, who would see less generous pensions, whether defined benefit or defined contribution," he said.