UK/Europe - The European Commission plans to adopt a "holistic balance sheet" approach to scheme funding rules which will treat sponsor covenants as assets, a consultation reveals.
The European Insurance and Occupational Pensions Authority's consultation on changes to the Institutions for Occupational Retirement Provision directive suggests it will explicitly value a sponsor covenant and the existence of the Pension Protection Fund when regulating scheme funding plan.
The consultation, launched yesterday, allays fears Solvency II-style capital requirements would be applied blindly to the pensions industry but it failed to win over industry figures who warn valuing covenants could be just as costly.
Punter Southall head of research Jane Beverley said: "While the apparent move away from a direct transposition of Solvency II requirements onto pension schemes is to be welcomed, it appears that similar tests will still be applied indirectly under the holistic balance sheet approach.
"There is a real risk here that we would simply be replacing one straitjacket for UK defined benefit pension schemes with another."
The consultation makes clear replacing existing IORPs with a "harmonised" regime would mean all "security mechanisms", such as continued support from sponsoring employers, would be recognised when assessing funding levels.
Current directives currently make a distinction between own funded, or Article 17, schemes and sponsor backed schemes.
Towers Watson senior consultant Mark Dowsey said: "The commission asked EIOPA how funding requirements should be further harmonised, not whether they should be.
"EIOPA has thrown some sand in the gears by insisting that the viability of its favoured framework depends on what this would do to the companies and pension funds affected.
"This note of caution will be welcomed by UK employers, who are responsible for more than 60% of the pension liabilities that would be covered by the new rules."
A further suggestion in the consultation, which runs to 517 pages and closes on 2 January 2012, is to limit deficit recovery periods to about 15 years.
Recovery periods in the UK exceeding ten years trigger further investigation by The Pensions Regulator.
The Pensions and Lifetime Savings Association (PLSA) has announced it will shrink its board by more than one-third as part of a governance overhaul to make it "agile and more appropriate".
Smaller FTSE 350 defined benefit (DB) schemes were nearly 15 percentage points less well-funded than larger schemes in 2017, according to a Goldman Sachs Asset Management (GSAM) analysis.
The advent of collective pension systems could help the UK avoid demographic challenges which will make it "impossible" for society to help savers in retirement, experts say.