The European Insurance and Occupational Pensions Authority (EIOPA) has issued an official opinion, addressed to the European Parliament, the European Council and the European Commission, on a "Common Framework for Risk Assessment and Transparency" for Institutions for Occupational Retirement Provision (IORPs). All UK defined benefit (and defined contribution) occupational pension schemes with over 100 members are IORPs.
The key point to note is that, "at this point in time", EIOPA does not recommend harmonising solvency (funding) requirements for IORPs. It recognises that IORP sectors across Europe are very heterogeneous and are "experiencing different challenges". EIPOA now suggests there should be a new risk assessment and reporting regime to run alongside existing funding systems in member states.
The possibility of a European solvency regime for defined benefit IORPs has been a highly contentious issue for over 10 years. The IORP Directive, which dates from 2003, applies (through national legislation) to all occupational pension schemes across Europe with 100 or more members and is an integral part of the single financial services market. Its original provisions were implemented in the UK by the Pensions Act 2004.
Two years ago, the European Commission unveiled a draft re-written Directive (IORP II). The intention was to bring the Directive more closely in line with the insurance sector directive, Solvency II, through the introduction of scheme solvency capital requirements. This aspect stalled last year as a result of the opposition of a number of member states and a new version of IORP II concentrates on governance and member communications.
Meanwhile, EIOPA issued a consultation paper in October 2014 on solvency, looking at how aspects of the "holistic balance sheet" – the foundation of the proposed new solvency measures for IORPs – might operate. They followed this up last year with a "quantitative assessment" across six member states, designed to assess the financial impact of the proposed solvency regime. Now, on the back of the results of the assessment, EIOPA has come to the conclusion that a "one size fits all" approach would not work.
EIOPA does, however, recommend strengthening the IORP directive with a common framework for risk assessment and disclosure for all IORPs other than those providing purely defined contribution benefits. Features of EIOPA's proposals include:
- common valuation rules for preparing a market-consistent balance sheet, based on the holistic balance sheet proposals. Liabilities would have to be valued on a near risk-free basis, recognising all available security and benefit adjustment mechanisms including sponsor support, pension protection schemes; and conditional and discretionary benefits;
- a standardised risk assessment, analysing the impact of a set of common, pre-defined stress scenarios on the balance sheet;
- reporting to national regulators on the balance sheet and risk assessment – annually, but member states could reduce this to every three years in conjunction with annual interim reports;
- public disclosure of the key elements of the balance sheet and the outcomes of the standardised risk assessment;
- allowing member states to exclude IORPs with fewer than 100 members, or assets of less than 25m Euros.
Comment & Actions
- This announcement lifts, for the immediate future at least, the threat of the imposition of the dreaded "holistic balance sheet" which was widely predicted to cause havoc for pension schemes – EIOPA's own figures forecast a 27% increase in pension liabilities across Europe.
- EIOPA's change of position does illustrate the power of organised and sustained lobbying on European pension issues – over half the evidence in the quantitative assessment opposing the proposal apparently came from the UK.
- All EIOPA is saying is that it is stopping work on it for the moment. The reference to "at this point in time" leaves open the possibility of the solvency issue returning in the future. References to scheme solvency are still in the introductory text to the latest version of IORP II.
- EIOPA does not have "legislative initiative" (the right to initiate new European legislation), so its proposals are merely recommendations. It is unclear whether the European Commission will take them forward. If it does, then although it will be a reporting rather than a funding obligation it will have significant administrative burdens – assessed by EIOPA at an annual cost of £167m for UK schemes.
- The IORP II proposal is still in place and due to be debated in the European Parliament in June. Three issues in particular could potentially have a serious impact on UK pension schemes: a new requirement for trustees to have adequate qualifications for their activities; more detailed member communications, including a standard but detailed annual benefit statement; and tougher scheme governance rules. For more information on this, see our client briefing: European Pensions Directive Mark II – focus switches to governance and communications.