Pensions: Regulation around Europe
Key regulatory issues summarised
For over 20 years, Denmark has had a Financial Business Act (Lov om Finansiel Virksomhed) which regulates banks, insurers, investment managers and other financial institutions.
However, it has become clear that the legislation makes it difficult to work out which rules pertain to which business. Moreover, rules which should relate only to banks, often affect insurers and other financial businesses covered by the same regulation.
A consensus has been reached to seperate the insurance regulation from the Financial Business Act, into an insurance act.
Insurance and Pension Denmark (IPD), the insurance and pension trade association, has welcomed this, as it will be easier to navigate, and clearly indicate which parts stem from European regulation and which parts from Denmark.
The act is likely to pass the Danish parliament (Folketing) in 2020.
A legislative overhaul took effect in December 2018, improving access to data on social security benefits.
Under law, payouts from some pension products – ‘aldersopsparing’ – are tax-free and do not reduce means-tested social benefits. But contributions are not tax-deductible, so someone who changes from contributing into a tax-deductible pension product to an aldersopsparing may receive lower social benefits because of means-testing.
Institutions offering aldersopsparing as a part of an occupational pension plan have been given access to data on social security benefits for those affected, so they can help customers decide whether the product is recommended.
Given the shift in pension savings from traditional, guaranteed with-profits products to non-guaranteed ones, IPD has introduced four initiatives, with industry rules and solution models to improve consumer information and risk management. These include pension projections and identical risk labelling of unit-linked products.
Following discussions, the Danish Financial Supervisory Authority (FSA) and life assurance companies have reached an understanding of how insurers will move their methodology for calculating liabilities to a system based on economic scenario generators and stochastic modelling of cashflows.
The transformation will take years and be costly. The industry fears that the FSA may enforce requirements going beyond those that companies in other EU member states face, thus giving them competitive advantage. Furthermore, the industry advocates a proportionality principle, so the nature of the business is taken into account when deciding how each company should comply.
But the IPD says the FSA seems reluctant to take such a measure.
Meanwhile, in 2020, the government will introduce a mandatory pension savings scheme for the unemployed, with 0.3% of the individual’s social benefits (overførselsindkomst) being contributed to these savings, rising to 3.3% by 2030.
The industry is lobbying for savers to choose the pension company to manage their savings. However, it seems these mandatory savings will be placed with ATP Livslang Pension.
At the annual conference of the conservative Christian Democratic Union (CDU) last December, members voted to abolish double contributions into the statutory health and long-term care insurance schemes from pensioners in occupational pension schemes (bAV pensioners).
At present, these pensioners are forced to pay their share of mandatory contributions, but also the share of a notional employer. In consequence, they contribute at least 14.6%, instead of 7.3%.
Furthermore, health insurance schemes apply additional rates which vary according to the scheme.
The junior coalition partner – the Social Democratic Party (SPD) – also wants this to end.
But doing so would result in a financial burden for health insurance providers.
In January, the ministry of health issued a draft bill to abolish the contributions representing the notional employer’s share. This includes raising the tax grant (from the general fiscal budget) by €2.5bn and lowering the liquidity reserve requirements of statutory health insurance schemes.
Since January, the Occupational Pensions Strengthening Act (BRSG) has required some employers to increase employee-financed contributions to external pension providers by 15%, since these contributions save the employer social insurance contributions. However, this depends on circumstances. The increase is limited to the actual amount saved by the employer.
However, collective bargaining agreements (Tarifverträge) may provide for a smaller increase, or no increase at all. For existing wage agreements (there is some debate as to which agreements are included), the obligation comes into effect in January 2022.
The law has been criticised by the industry, since many significant questions are far from clear. These include: How are actual savings calculated? Which tariff applies to the extra contribution? Which schemes/employees are exempt until 2022?.
After the financial regulator BaFin issued supervisory requirements for banks in relation to information technology (BAIT), it published and put in place corresponding requirements for the insurance industry (VAIT) in July 2018.
These set out the minimum requirements which every insurance, or pension provider, has to fulfill, relating to information and communication technology (ICT). The intention is also to strengthen ICT-related risk awareness among insurance and pension providers and to assess ICT risks in the supply chain, that is to include ICT service providers as well.
In consequence, IORPs must name an individual in their organisation who is responsible for ICT risk assessment and ICT-related issues, and to formulate ICT strategies and guidelines.
The 2017 general election resulted in Dutch prime minister Mark Rutte’s third cabinet – a coalition made up of his VVD party and smaller parties. The coalition agreement included reaching consensus on a new pension contract in 2018, to future-proof the pension system, with legislation to be enacted in 2020.
In April 2018, social affairs minister Wouter Koolmees sent a letter to the lower chamber of Parliament underlining the importance of social partners in the creation of a new pension system. For Koolmees, the abolition of the career average system and promotion of more individual pension capital, combined with the preservation of collective risk-sharing, remain starting points for the new pension system.
In November 2018, Koolmees informed the lower chamber that no agreement had been reached despite intensive discussion between the Cabinet and social partners.
The cabinet is considering its next steps. Urgency in reforming the pension system remains, especially given the current financial situation of many pension funds and members’ decreasing trust in the system. Koolmees does not want to wait longer and has sent a letter with his pension plans to the upper chamber.
A law covering miscellaneous pension matters was adopted by the upper house last December, and came into force in January. It covers:
- the automatic value transfer and surrender of very small pensions;
- data delivery to De Nederlandsche Bank;
- bridging pensions;
- employee participation in small businesses;
- premium payments based on actual monthly amounts paid to employees and not estimates.
Furthermore, this collective law spells out explicitly that a pension fund board is always responsible for asset management, even where it is outsourced.
New legislation covering the consent of participants involved in a collective value transfer to a cross-border pension administrator was approved in 2018 by both parliamentary chambers.
The law says that a collective value transfer to a cross-border pension vehicle is only allowed if two-thirds of the total of participants are in favour, and two-thirds of retirees are in favour as well. This approval is only requested where a company moves its pension liabilities abroad, and not if the pension liabilities are moved to another domestically-domiciled administrator.
“The enactment of this law was somewhat surprising, as requiring such approval is a remarkable legal provision since it appears discriminatory,” says Corine Reedijk, senior asset-liability management (ALM) consultant at Aon Hewitt. “As a result, this stipulation is being challenged by some key legal experts.”
The implementation of IORP II is scheduled to take effect in July, although this could be delayed.
Insurance companies and friendly societies offering pensions will have to change their legal status to an occupational pensions company, offering only occupational pensions. They will be subject to regulation based on IORP II, but with additional risk-based capital requirements. The regulation has been delayed, but will take effect on the same date as the IORP II legislation.
There are special provisions for insurance companies offering both life and pensions business.
The transitional rules for occupational pension business within insurance companies came into force in January 2016 and officially remain valid until the end of 2019, although it is now proposed to delay this further.
Friendly societies have until the end of June to change their status, but there are plans to postpone this until November.
Following the introduction of a code of practice on information – including fees – for policyholders and pension beneficiaries relating to transfers of defined contribution plans and private pension savings between life companies, the Swedish Financial Supervisory Authority is continuing work to increase transparency. Meanwhile, the state pension portal Minpension.se is developing a system of digital information for transfers.
After criticism of perceived high fees for pension transfers, the government had previously proposed rules restricting administrative charges and up-front commission expenses imposed by life companies carrying out these transfers.
Despite industry opposition, the government was expected to publish the necessary changes in insurance legislation but these have not yet emerged.
In 2017, a referendum rejected plans to reform the first and second pillars of the pension system to make them sustainable. The government has now decided to seperate the two reforms.
A referendum on a new funding plan for the first pillar (AHV) – linked to a bill on corporate taxes – will take place on 19 May 2019.
For the second pillar (BVG), employers and unions are negotiating outline reforms, with the results expected this spring.
Key issues are the minimum conversion rate used to calculate pension payouts from accrued assets, and to what extent the reduction in future pensions should be compensated for.
Meanwhile, the government is continuing its efforts to regulate the bulk transfer of pensioner liabilities by making these transfers subject to the regulator’s approval.
The aim is to ensure that pensioner portfolios transferred to another scheme are adequately funded.
A public consultation ended in 2017, with an updated draft now in preparation for debate in Parliament.
While everyone agrees that pensioner liabilities must be sufficiently funded, both pension funds and regulators raised questions regarding the practical aspects. One question is whether there should be a size threshold for pension schemes: companies merely changing pension provider by definition create transfers, which, given the large amount of provider changes every year, could cause logjams.
New regulations on risk control and governance for the increasingly important multi-employer pension funds are on the horizon.
A consultation ended this January but the draft proposals from the top Swiss second pillar regulator (OAK) have been criticised by industry associations, among them the Swiss Association of Pension Funds (ASIP). Regulatory overload, the costs of reporting requirements and perceived impracticability are the main arguments. It is also claimed there is no legal basis for these rules.
According to Simon Heim, head of Swiss Life’s employee benefits legal practice, current pension legislation does not contain specific rules for multi-employer funds.
“In practice, this leads to unanswered questions and sometimes makes control difficult,” Heim says. However, he thinks that addressing these issues should be up to the policymakers and not the regulator.
The ‘no legal basis’ charge is also levelled at another OAK directive, which aims to introduce binding standards for determining the technical interest rate (discount rate) used to value pension liabilities. In OAK’s opinion, the existing guidelines of the Swiss Chamber of Pension Actuaries (SKPE) have “shortcomings”.
The OAK has been criticised for undue haste in proposing its standards, since the SKPE is still discussing a revision of its own guidelines.
A public consultation on the directive has just ended.
The plans to allow greater flexibility in asset allocation for collective pension investment foundations are advancing, as a public consultation ended last December. The ordinance governing these vehicles (ASV) would be changed with regard to mixed portfolios, allowing equity weightings over 50% and raising the cap on alternatives to 25%. Direct investments in alternatives would also be allowed. And investors would be given more say in decision-making.
The proposed changes could take effect this year or next.
Draft regulations scheduled to come into effect the day the UK leaves the European Union (29 March 2019) make amendments to UK pensions legislation. These are not intended to change policy, but to ensure that after Brexit, legislation continues to make sense and work effectively. As part of this, regulations on cross-border pension schemes will be revoked.
If Brexit is deferred, the date when the regulations take effect will be changed accordingly.
From April, the Senedd (Welsh Assembly) has the power to vary the rates of income tax in Wales, so trustees and administrators must ensure their systems can cope with any divergence from UK-wide rates.
Following a consultation last year on trustees’ investment duties, regulations on new requirements for the statement of investment principles (SIP) come into effect in October. Schemes which have to produce a SIP will have to review this and cover more areas, such as environmental, social and governance (ESG) and stewardship issues.
SIPs for DC schemes will have to be published online, and from October 2020 have to produce implementation reports showing how they have acted on the principles set out in the SIP.
A government consultation on the consolidation of DB pension schemes into superfunds closed recently. The premise is that superfunds could improve funding and governance, and provide economies of scale and more security for members.
The consultation sets out proposals for a future legislative framework for authorising and regulating superfunds.
The pensions dashboard is scheduled for 2019; a government consultation and feasibility study has ended, and a response is awaited.
The dashboard is an initiative which would allow an individual to see information on all their pensions in one place, with the government envisaging an industry-led service framed by government policy and legislation. The consultation set out the government’s recommendations based on an earlier study.
Changes in the role of the Pensions Ombudsman (TPO) are likely in 2019, following the consultation on the scope of TPO’s role including an early resolution service, and how any changes would integrate with a scheme’s internal dispute resolution processes.
Meanwhile, according to Anne Bennett, senior associate at Mercer, the High Court judgement in the Lloyds Banking Group case in October 2018 means that schemes with guaranteed minimum pension (GMP) liabilities accrued from May 1990 onwards should be considering what action they should take to equalise scheme benefits between men and women.
Points such as the treatment of past transfer values, and possibly also the appropriate approach where the implementation cost of equalisation exceeds the value of the additional benefit, may be revisited at a further court hearing.
Bennett says the industry is also hoping for input from the UK tax authority HMRC on various questions around the tax treatment of benefit uplifts and reshaping arising from a GMP equalisation exercise, as there is currently a danger that equalisation could in some lead to unauthorised payments, and loss of fixed or enhanced lifetime allowance protections.