The European Insurance and Occupational Pensions Authority (EIOPA) dropped something of a bombshell in early April with its preliminary results for the first quantitative impact study (QIS) on the revised IORP Directive. The so-called ‘holistic balance sheet’ (HBS) approach, it said, could lead to pension fund deficits of nearly €290bn in the Netherlands and more than €526bn in the UK. People in the pensions industry in those countries certainly raised a few eyebrows on seeing those estimates in black and white, but the real question behind EIOPA’s prognostications is how they were arrived at, and what they entail.
Eight countries took part in the exercise – Belgium, Germany, Ireland, the Netherlands, Norway, Portugal, Sweden and the UK. Pension funds participating in the QIS were required to assess the impact of three HBS approaches: the benchmark, and the upper-bound and lower-bound scenarios.
Under the benchmark scenario, only IORPs in Sweden and some pension funds in Germany (Pensionfonds) recorded a surplus – of €1.3bn and €500m, respectively – as the capital requirements appear to be lower than those that regulators currently apply in those member states. Pension schemes across all the other member states encountered deep shortfalls.
For the upper-bound scenario, participants were allowed to use sponsor support but were prohibited from using pension protection schemes as an asset. This led to significant shortfalls for countries that depend on those security mechanisms. Results suggest that the Netherlands would record a deficit of €288.7bn, while the UK would record a surplus of €1.2trn.
Under the third scenario, overall, all countries would face a steeper deficit, as risk benefits and risk margins were not taken into consideration in the calculation.
From these observations, it seems difficult to draw any conclusion on the financial impact the HBS could have on pension schemes. As EIOPA points out in its preliminary results, the outcomes show “substantial variation between participating countries as a result of differences in assumptions”. PensionsEurope highlights this point in its reaction paper to the QIS, arguing that it is “almost impossible” to create harmonised quantitative requirements for IORPs in such varied legal environments. More important, and as EIOPA also concedes, the figures in its preliminary results are aggregated, shedding no light on the calculation methods used by each scheme within a given country.
It is therefore essential to look beyond those figures, as they mask some important variations. Dave Roberts, senior consultant at Towers Watson in London, explains that, in the upper-bound set, the potential maximum value of sponsor support is being counted as an asset. This produces a large aggregate surplus owing to large sponsors having the whole of their potential support to the scheme included. “However, the position would still look bleak for schemes where the sponsor was in deficit on the benchmark approach,” Roberts says.
The results would therefore suggest the European Commission will not base the first pillar of the revised IORP Directive on one of the sets of assumptions already consulted on. Even if Brussels decided to draft such an economically unpalatable regime, the parliament and council would most certainly reject them.
A notion currently gaining popularity across Europe is that Michel Barnier, the commissioner for internal market, is thinking of dropping pillar one – for now at least – to focus instead on pillars two and three.
But a third option could be a tailor-made approach, whereby each member state would use its own calculation methodology. This would lead every EU country to impose solvency capital requirements on their own IORPs. In that sense, some consistency would apply across the 27 member states. However, adopting different methodologies would certainly lead to a flawed framework for pensions. More important, it’s just the opposite of what Brussels aims to achieve.