UK - A consultation process launched by the European pensions regulator to evaluate the content of the future quantitative impact study (QIS) for a revised IORP Directive asks the wrong questions and is subject to an “inadequate” timeframe, a number of UK pension representatives have claimed.
Responding to the consultation paper on the QIS launched by the European Insurance and Occupational Pensions Authority (EIOPA) in June, the pension industry in the UK voiced concerns over the “narrow” scope of the impact study exercise as well as the tight timetable imposed by the European Commission, giving EIOPA an “impossible task” to conduct.
According to the National Association of Pension Funds (NAPF), the six-week period allowed for the present consultation was “completely inadequate” for careful consideration of the complex issues raised, as it did not allow stakeholders to get detailed input from technical experts.
“NAPF recognises that EIOPA’s timetable is largely driven by the European Commission’s objective of delivering a draft Directive by summer 2013,” the association conceded. “But EIOPA - as the EC’s adviser - should make it clear that more time is needed to test policy options and develop a sound policy proposal.”
The association further argued that the Commission’s own general principles and minimum standards for consultation of interested parties stipulated a minimum of eight weeks for consultations - concluding that the consultation was “in breach of the EC’s own standards”.
Punter Southall echoed many of the concerns over the “tight” timetable imposed by the Commission and regretted the potential application of Solvency II-type elements amoung IORPs.
According to the consultancy, applying a holistic balance sheet (HBS) based on Solvency II to defined benefit pension schemes could have “massive” consequences.
“These are issues that demand careful and considered scrutiny, not a six week consultation,” the consultancy said, before adding that the proposals for the insurance industry were subject to five separate impact studies.
“It seems bizarre that the European Commission should propose only one QIS for pensions, when many of the elements of the holistic balance sheet that are unique to pension schemes have only just been put forward for discussion for the first time,” it argued.
Andrew Vaughan, a partner at rival consultancy Barnett Waddingham, therefore feared that EIOPA’s advice on the HBS approach would not be properly scrutinised by the Commission once the authority submits its report and a “flawed” Directive would be “rushed through”.
Beyond those concerns, Towers Watson also argued that EIOPA had to make a large number of technical assumptions about how assets and liabilities should be valued and it was not clear whether all of the ensuing consequences were intended.
“It appears that the contributions employers make to pension schemes can sometimes have the paradoxical effect of increasing the deficit on the proposed new funding measure rather than reducing it.”
The consultancy, discussing a UK-specific example, said that this would be the result of the physical assets increasing, resulting in a lower claim to the Pension Protection Fund (PPF) were the sponsor to go insolvent, combined with a decrease in the value of the sponsor support.
Additionally, it claimed that the impact that new funding targets would have on company finances and on members’ benefits depended on what steps would be taken, and how quickly these could be taken, to repair any deficit.
Towers Watson further highlighted that the Commission had asked EIOPA to carry out a QIS before indicating what the regulatory response to funding shortfalls was intended to be.
Huw Evans, a senior consultant at Towers Watson, said: “It is putting the cart before the horse to try to measure the impact of the new regime when key details have not even been pencilled in.
“The big unresolved question is what employers will have to do when the combined value of scheme assets, sponsor support and other security mechanisms is judged to be less than the new insurance-style measure of liabilities.”
He added: “The only thing that could then be done to improve the security of members’ benefits would be to strengthen the business, which is not something that regulators can simply command.
Kevin Wesbroom, managing principal at Aon Hewitt, therefore urged EIOPA and the Commission to consider how their proposals compared with alternatives and point to the “funding stabilisation” approach, recently adopted in the US, which eases the burden on plan sponsors in light of artificially low interest rates.
Wesbroom concluded: “It is imperative that the EU considers how its current approach, specifically with regard to funding obligations, is likely to challenge the global competitiveness of European companies relative to companies enjoying more considered regulation.”