Pension funds in Norway are calling for proposed new solvency regulation for the sector to be re-drafted to make sure their infrastructure and mortgage-backed bond investments are not treated more onerously than those of competitors in the life insurance sector.
Responding to the Finance Ministry’s consultation on new capital requirements for pension funds, law firm Thommesen said on behalf of several pension funds that they should be allowed to use a reduced stress factor for investments in mortgage-backed bonds and infrastructure, in line with the position for life insurance companies.
The firm is representing the ABB pension fund, the municipal pension funds for Aker, Trondheim and Bergen, the consultancies Gabler and Mercer Norway, Pareto Alternative Investments, the pension fund for health authorities in the metropolitan area (Pensjonskassen for helseforetakene i hovedstadsområdet) and the Skagerak Energi pension fund.
Tore Mydske, a lawyer at the firm, argued that these investments were long-term, stable investments.
He said the FSA did not propose allowing pension funds to apply a reduced stress factor to these investments when capital requirements were calculated — as is the case for life insurers under Solvency II.
The regulator is justifying this difference, Mydske said, with its aim of simplifying the rules for pension funds, but he said it would put pension funds at a competitive disadvantage to life insurers.
The State Pension Fund (SPK), which runs the pharmacists’ pension fund, Pensjonsordningen for apotekvirksomhet (POA), said it agreed with Mydske’s feedback.
The fund said the new draft requirements violated the principle of equal risk in the regulation with regard to requirements for investments in mortgage-backed bonds, and claimed they reduced pension funds’ opportunities to invest in infrastructure relative to life insurance companies.
The Norsk Hydro pension fund also came out against the introduction of the proposed simplified Solvency II regulations, saying they went against EU pension fund regulation.
Pointing to a report from the firm Samfunnsøkonomisk Analyse, research foundation FAFO, NHH school of economics and actuaries Lillevold & Partners, the Norsk Hydro group director and CFO Eivind Kallevik wrote that he agreed with the report’s conclusion that the increased capital requirements for pension funds could lead to negative consequences, including a poorer functioning capital market in Norway that fluctuates more wildly and is less liquid.
The Norwegian Association of Pension Funds (Pensjonskasseforeningen) said there was no need for a new regulatory framework.
In a joint submission, the Norwegian Association of Pension Funds, the Confederation of Norwegian Enterprise (NHO), the Norwegian Confederation of Trade Unions (LO), the Pensioners’ Association (Pensjonistforbundet) and the engineers and technologists’ union NITO said: “Norwegian pension funds are solid, and changes in the regulation will cause great inconvenience for businesses.
“The proposed legislation is largely based on Solvency II, but the EU has envisaged pension funds being governed by IORP II, not Solvency II.”
However, Norges Bank, the Norwegian central bank, said it supported the use of simplified Solvency II requirements for pension funds.
In a written response to the consultation, directors Torbjørn Hægelund and Sindre Weme said: “This will contribute to equal protection for all pension customers, regardless of whether they have agreements with a life insurance business or a pension fund.”
Finans Norway, the financial industry organisation, also backed the FSA’s proposal, saying pension funds in the country must be as secure as life insurance companies, adding that the current solidity regulations for pension funds had significant weaknesses.
The Finance Ministry put its proposal on the introduction of new capital requirements for pension funds out for consultation on 28 September last year, giving a deadline of 9 January 2017 for responses, saying current capital requirements for pension funds took little account of the fact market interest rates and yield prospects changed over time.
The FSA (Finanstilsynet) is proposing that pension funds be subject to a simplified version of the new capital requirements for insurance companies under the domestic version of the EU Solvency II regime.
According to the proposal from the FSA, new capital requirements for pension funds should be introduced with effect from 1 January 2018 but include a transitional period until 1 January 2032.
The Ministry of Finance said it would assess the need for these capital requirements, and the design of the regulation around them, in the light of the feedback it got from the consultation.
PensionsEurope, the European umbrella association for national workplace pension bodies, warned back in October about about the detrimental effects of the Norwegian plans to introduce solvency capital requirements for pension funds.