EUROPE - A plan to include pension funds within the Solvency II framework could doom pan-European pension funds before they have even caught on, a critic has claimed.
Solvency II is a set of requirements similar to Basel II, relevant to the banking and insurance industries, that some in CEIOPS want to extend to occupational pension funds.
According to Peter Kraneveld (pictured), special advisor in international affairs at PGGM, DB pension funds would not bother setting up as cross-border entities because of the strict funding ratios this would entail under the proposed framework.
For instance, for Dutch pension funds, the funding ratio requirement is 97.5%, meaning that on average, once in every 40 years a pension fund would be underfunded.
However, under Basel II, read Solvency II, this would be 99.5% – a situation of underfunding once every 200 years.
At 99.5%, the only option to avoid punishing funding ratios would be to move almost entirely into bonds, while at 97.5%, a pension fund could remain diversified, argued Kraneveld.
CEIOPS has argued that if Solvency II were not applied to pension funds, the EU would have to justify why pension fund beneficiaries needed less security than insurance and bank clients.
But according to Kraneveld, DB pension funds and banks are different animals: “This is the big fight in Europe. Pension funds are different, especially as they are long term investors.”
A decision is set to be taken in 2007, for implementation in 2010.
“I can’t see DB plans considering it’s worthwhile to lower their returns to such a degree just to become international,” said Kraneveld. “This would kill the baby before it’s born.”
A further concern relates to the negative effect the proposals could have on long-term, diversified investment portfolios. Using the Dutch system as an example, Kraneveld said a shift from DB to DC could endanger the benefits of solidarity through the application of Solvency II.
Solidarity in the Netherlands is applied to public sector industry-wide multi-employer pension funds. It had resulted in a better division of risk and higher returns at lower cost, leading to a mix of better pensions and lower wage cost, he said.
This in turn had meant better competitivity and higher growth. “These efficiencies are realised because of a long-term, diversified investments portfolio,” said Kraneveld.
Responding to the criticism, Henrik Bjerre-Nielsen, chairman of CEIOPS, said: “CEIOPS has not taken a position with regard to whether pension funds should be covered by Solvency II. I have just stated that I expect them to be covered by similar rules, in the same way as pension funds operating cross-border today are covered by the Solvency I rules of life insurers. With regard to the impact of Solvency II on investment policies I consider it premature to draw any conclusions.”
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