A lengthy phase of regulatory uncertainty looks likely as questions on the implementation of EU directives remain unresolved, according to Carlo Svaluto Moreolo
Sweden’s newly elected left-wing government must deal with a number of politically-charged pension fund regulations and will have to do so with a weak parliamentary majority.
While the restructuring of the AP buffer fund sector dominates the agenda, stakeholders of the private pension industry are debating the fate of Swedish funds ahead of the occupational pensions directive IORP II and the implementation of Solvency II.
In a pre-emptive move at the end of August 2014, the out-going government announced proposals for a new pension framework, which imposes capital requirements that exceed those outlined within IORP II.
The rules, planned to take effect from 2016, were designed by a committee chaired by Tord Gransbo, which was asked to look at how the two directives would be implemented; in Sweden the line between the pension and insurance business is blurred.
However, the country already has separate rules for insurance companies and occupational pensions providers and the committee’s task was to study how IORP II and Solvency II would be harmonised within the existing framework. This would help companies decide whether to offer retirement benefits through an insurance related company or an occupational pension fund.
Peter Hansson, chairman of Tjänstepensionsförbundet, the Swedish occupational pension funds’ association, and the CEO of banking sector pension fund Sparinstitutens Pensionskassa (SPK), argues against the capital requirement proposal, saying that it will cause “a waste of pension money”.
“The committee is trying to implement capital requirements before they are implemented through IORP II. They are forcing us to implement something twice, since we will have to adapt to the coming EU rules.”
Proposals for a new framework for Swedish pensions
Under rules proposed to anticipate IORP II, pension funds would be subject to three capital requirements: a flat-rate capital rate, a risk-based capital buffer or a guarantee-based requirement. In order to comply, funds need to hold capital equal to the highest of the requirements.
Breaching the capital rules will not be considered as serious an offence as falling short of the flat-rate measure (which would be an infringement of the IORP Directive).
This risk-based requirement is seen as a way to incentivise good risk management, and capital shortfalls will be allowed if a third party can fill the funding gap.
Hansson suggests that higher regulatory capital requirements – to which IORPs would be subject as part of the new rules – are similar to those that apply to insurance companies regulated under Solvency II. However, he says, IORPs and insurance companies are different animals, even though they both provide retirement benefits.
The debate is underpinned by a tension between regulation of products – which historically has been the approach in Sweden – and regulation of providers. The EU directives are based on the latter approach, whereas Gransbo’s committee, Hansson says, “seems to be hanging on to the old way”.
The risk for occupational funds, according to Hansson, would be additional administrative costs, particularly if the new requirements have to be implemented twice. When the new rules on capital requirements kick in, funds will have to employ external consultants to help with the implementation and budget for new IT systems as well as a higher level of reporting.
The neccesary additional resources, Hansson warns, may result in a reduction in pension benefits. He says the funds his association represents are “small, purpose-built organisations”, designed to handle benefits in a highly efficient manner.
“Every new cost burden could reduce the employers’ willingness to provide occupational pensions to their employees. There is no ‘extra money’ available and all new costs must be justified,” Hansson says.
The funding requirement is not the issue. Under Swedish law, funds need a solvency ratio of 104% or they face penalties and possibly closure. Moreover, the Swedish FSA’s traffic lights system means there already is a link between solvency requirements and risk levels.
Hansson believes the sector, as a result, is well funded and funds will not need to make significant portfolio reallocations to match heightened solvency requirements.
However, the devil is in the details. Hansson says: “We might need to do some adjustments to allocation – which again will be costly.”
But the new rules are expected to fill a ‘legal vacuum’ that prevents the creation of new IORPs in Sweden, and existing ones to merge.
Swedish pension foundations – pensionsstiftelser – the entities that fund pension benefits owed by corporations, are also unhappy with the way lawmakers are dealing with EU legislation.
Annette Tiljander, chairman of pension foundations’ association Svenska Pensionsstiftelsers Förening (SPFA), says her association questions many of the proposals contained in the new directives.
The special nature of Swedish pension foundations means these institutions “have no obligation to employees”, Tiljander says. They are mainly used as a trust, carry no liabilities themselves and, as a result, they cannot provide pension benefit statements.
Pensions in Sweden
• Nine Swedish occupational pension funds (Pensionkassor) are grouped in an association, Tjänstepensionsförbundet, which represents around 1m employees at about 2,500 companies and combined pension assets of about SEK127bn (€14bn).
• Pensionsstiftelser, or pension foundations, are vehicles that finance retirement benefit promises made by companies. Their association, Svenska Pensionsstiftelsers Förening (SPFA), has 47 members and represents SEK170bn (€18.7bn) of pension assets.
“The pension liabilities remain with the employer,” Tiljander continues. “Since pension foundations have no obligations to the employees they cannot be subject to solvency rules. When IORP I was implemented in Swedish law the capital requirements were excluded for pension foundations.”
Therefore, IORP II rules concerning reporting requirements will be difficult, if not impossible, for pension foundations to comply with, Tiljander concludes. “The new regulations will increase costs for pension foundations and make them an unattractive solution for companies,” she says.
Furthermore, she adds, pension foundations are not financial market institutions – they are entities tasked with providing occupational pension for employees and are linked to an employment relationship.
Pension foundations have been in the spotlight since the energy company Vattenfall dismantled its SEK7bn (€834m) pension foundation in
2012 due to concerns about the risk of its investments.
Although an isolated occurrence, it is understood other companies have considering closing their pensionsstiftelse to avoid the new costs.
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