IPE speaks with Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority (EIOPA), about revisions to the directive on Institutions for Occupational Retirement Provision (IORP) and the European Commission's White Paper on pensions.
IPE: EIOPA submitted its advice on the revised IORP directive on 15 February, but since then, several figures in the pensions industry have criticised the lack of a "firm view" on Solvency II measures. Do they have a point?
Gabriel Bernardino: I don't think our advice is lacking a firm view. The advice on the revised IORP directive we sent to the European Commission last week is clear and comprehensive. We are delivering an advice that is based on a set of very concrete questions - based themselves on the Solvency II framework - that were raised by the Commission.
Our advice is consistent with Solvency II in a number of areas such as governance, risk management and internal control where we believe due care needs to be taken on proportionality due to the differences arising in the pension fund area.
However, in other areas such as solvency, while a risk-based regime can and should be adopted by the IORPs, it should be done in a different way than Solvency II. This is the reason why we included in our advice the holistic balance sheet (HBS) approach, which is clearly different from the Solvency II balance sheet.
We have looked at the risks that pension schemes have. Where the risks are similar, the sound framework of Solvency II can be the basis. However, where the risks are different, we need to allocate different tools. This explains why, with regards to the HBS approach, we recommend that the sponsor support - a very important element in the structure of many EU pension schemes - should be identified as an asset. This approach differs completely from the Solvency II measures.
In fact, there are various areas on the solvency discussion where we deviate from Solvency II. Our principal, as I have always said, is not to have a copy-paste exercise from Solvency II to the pension fund directive.
IPE: How would you then define the HBS measures?
GB: The HBS is a new concept, and, as with all new concepts, we are continuing to work on it. The HBS is a very promising approach to take into account the various adjustment and security mechanisms that exist in the pension area and that differ from one country to another. For instance, elements like the conditional indexation of pensions, the own funds that in some countries already comply with the Solvency regime, the sponsor support and the pension protection funds will need to be incorporated in the HBS view. That will lay the foundations for the principals of transparency and market consistency, and the valuation of assets and liabilities. But, in a way, this will also take into account the different elements from the different EU member states.
Nonetheless, even though the concept is promising, we are still at the beginning of this journey, and we need to conduct quantitative impact studies (QIS) to make sure of the feasibility of such measures.
IPE: What will be the next steps in the implementation of the QIS?
GB: The QIS is part of the Commission's requirements. I hope this first test will give us an idea about the set of options on the implementation of the HBS. On the basis of what should be tested, we will include in our QIS a range of questions on the discount rate, the technical liabilities, etcetera. This is a first assessment, and it will possibly raise more issues we will review in future.
We intend to have the common technical specifications for the QIS finalised by the end of March. We will then need to receive some input from the Commission confirming we are testing the options they believe are the relevant ones.
The test will be performed by the different member states, hopefully over May and June. At the moment, seven countries have already confirmed their participation. These are the countries where defined benefit plans play a significant role. The countries are the Netherlands, the UK, Germany, Portugal, Belgium, Ireland and Sweden. We hope to have a first report to present to the Commission at the end of September. This will then be used by the Commission to publish its final proposal on the revised IORP directive.
IPE: Did the Commission itself impose such a short time scale?
GB: The QIS was part of the request from the Commission. The timeline is set by the EC. We are seeking to conduct a first assessment within that timeline, even though we know this is a challenge.
It is also very likely that the results from the first QIS will require further work and further tests. Nonetheless, we will be able to give some signals to the Commission at the end of the third quarter for them to pursue their work on the revised IORP directive.
IPE: The Commission's final White Paper on pensions introduced one significant change to previous drafts, referring for the first time to the need to maintain a "level playing field" with Solvency II. What do you make of this?
GB: It is important to understand that the IORP directive and the White Paper are two completely different work streams. EIOPA was not involved in the redaction of the White Paper.
The proposal number 11, in which the Commission says it will present a legislative proposal to review the IORP directive this year to "maintain a level playing field with Solvency II", could also be interpreted in a different way. Again, where you have a similar risk, you have to keep a consistent approach, and where you have different risks, you need to have different tools. This has always been the idea expressed by the European Commission.
IPE: The Commission's decision to amend proposal 11 of the White Paper has given some the impression that Brussels has already made up its mind on including Solvency II measures in the revised IORP directive. Are you confident the Commission will take EIOPA's advice into account?
GB: I am more than confident that the Commission will take very seriously EIOPA's advice on the revised IORP directive. Of course, they are not bound by it. But the Commission will take this into consideration, as our advice is very clear and very well explained.