The Norwegian finance ministry has called for regulation introducing binding capital requirements for the country’s pension funds, based on a simplified version of the Solvency II framework for insurers.
The recommendation backs that of Finanstilsynet, the country’s financial services authority (FSA), which the government had commissioned to look into solvency requirements for pension funds engaged in life insurance.
The FSA has until the end of June to come up with draft regulations, the finance ministry announced late last week.
It referred to a letter from the FSA in late January, in which the supervisory authority said the current yield outlook pointed to the need for the solvency regime for pension funds to be strengthened and made “more risk-sensitive”.
A Finanstilsynet spokesperson told IPE that the FSA’s proposal applies to pension funds engaged in life insurance activities (biometric risk and risk on return on investment), which all but one under its supervision are.
Norway’s finance ministry said it agreed with the FSA’s recommendation for new solvency requirements, which, because Solvency II is a “comprehensive and often complex” regulatory framework, should be based on a simplified version of Solvency II.
Finanstilsynet said the solvency requirements for pension funds should be formulated on the basis of stress tests already established by the supervisory authority and well-known to pension funds, and the finance ministry has backed this.
In Norway, pension funds are obliged to carry out stress tests, of which there are two types.
Stress Test 1 is a mark-to-market test of both sides of the balance sheet, under which funds should have enough capital to cover the market value of their obligations.
Up until now, this stress test has been a recommendation but not a capital requirement measure, Tor Sydnes, director at consultancy Gabler, told IPE.
“The pension funds have been obliged to do this test, but they don’t have to fulfil it,” he said. “The suggestion now is that the outcome of Stress Test 1 should be a capital requirement.”
For some pension funds, the new requirements would represent “business as usual”, he said, but there are some pension funds in Norway that have become pension funds for paid-up defined benefit policies as a result of the employer’s leaving the scheme, and it is these funds that would face problems as a result of capital requirements.
Although at the moment this applies to perhaps fewer than 10 of the roughly 80 pension funds in Norway, Sydnes said it could become a bigger issue, given the low-interest-rate environment, and as more and more corporates leave their defined benefit schemes to go over to a defined contribution scheme.
In moving to introduce binding capital requirements for pension funds, Norway is going further than policymakers in the EU, a point indirectly made by the finance ministry and one that has raised eyebrows among pension funds in the country.
The finance ministry noted that Finanstilsynet “also points out that any new capital [requirement] in the EU/EEA legislation seems to lie further ahead than previously thought”.
Norway is not in the European Union but is part of the European Economic Area (EEA).
The pension fund industry in several EU countries is strongly opposed to capital requirements, which were left out of the proposal for a revised EU law on occupational pension funds (IORP II) but are still feared as a potential outcome of the work being done on the holistic balance sheet (HBS) by the European Insurance and Occupational Pensions Authority (EIOPA).
The Norwegian finance ministry acknowledged that forthcoming capital rules may need to deviate slightly from those for insurers, such as with respect to the effect of deferred taxes and the definition of capital, and that the capital requirements may also need to be further tailored based on the size of a pension fund and the nature of its business.
A consultation should be carried out on these matters, it said, mandating the FSA to prepare a consultation paper and draft regulation by the end of June.
The question of when the requirements should become effective should be discussed separately, said the ministry.
The FSA had in its letter from late January recommended that simplified Solvency II requirements for pension funds be introduced from 1 January 2018.