The European pensions regulator has decided not to pursue an EU-wide capital regime which is being hailed as good news for UK schemes.
The European Institutional and Occupational Pensions Authority (EIOPA) is proposing a different system to the controversial solvency-based funding regime which would have increased the total deficit of UK defined benefit (DB) pension funds to £770bn from £253bn.
It wants to introduce an EU-wide reporting regime that would sit alongside existing regulation, according to its report on the Quantitative Assessment of the Holistic Balance Sheet (HBS). This will involve valuing liabilities on a 'risk-free' basis, valuing the support provided by the sponsoring employer and calculating a risk value.
EIOPA believes this will enhance risk management and transparency of pension funds.
Its chairman Gabriel Bernardino said: "This opinion presents a major step forward towards realistic, risk-sensitive information on the financial situation of pension funds.
"EIOPA's recommendations to modernise the European regulation of pension funds aim at supporting the occupational pensions sector to meet its current and future challenges.
"Relevant transparent disclosure will trigger a dialogue on the long-term sustainability of occupational pension promises and encourage timely adjustments. As such, our recommendations contribute to the protection of pension scheme members and beneficiaries and to a fair distribution of shortfalls between generations."
Pensions and Lifetime Savings Association chief executive Joanne Segars welcomed the news:
"EIOPA's decision to end its work on solvency marks an important development in the long-running debate about a solvency-based funding regime for pensions. It is good news for pension schemes in the UK and Europe and a result our member pension schemes have campaigned tirelessly to reach."
However she is concerned about the proposed reporting regime that EIOPA acknowledges would add €210m (£167m) a year to costs.
"It would cause unnecessary confusion without delivering any benefit to scheme members
"We believe there are more pressing priorities for EIOPA to pursue such as extending workplace pension saving to the 60% of EU citizens who have no access to it at present. Abandoning the solvency project is a good decision, but EIOPA should now go further and drop the HBS altogether."
PensionsEurope chair Janwillem Bouma said: "Risk management is essential for IORPs and they regularly carry out their own stress tests and scenario analyses (e.g. Asset and Liability Management studies) as part of their own risk management processes. EIOPA proposes an additional framework, which we find unnecessary and it is costly."
Barnett Waddingham actuary Rowan Harris called it the "least worst option" but warned:
"While certain small schemes could be exempted, those in the €25 million to €100 million range could still struggle to approach the holistic balance sheet in a proportionate way.
"That's not to say that these schemes shouldn't undertake risk management - just that there are other tools better suited to them. The case for a common framework, above and beyond this, at European level has not been adequately made."
Also, given that EIOPA has only said it does not advise on harmonising capital or funding requirements "at this point in time", does not necessarily mean it will be considered in the future.
Harris warned: "If the European Commission chooses to dip its toe in the water by taking forward EIOPA's recommendations, it may not be long before they take the full plunge."
Key points from Eiopa's proposals
- EIOPA recommends common framework for risk assessment and heightened transparency for pension funds.
- EIOPA says it would strengthen the European regulation of pension funds and contribute to the sustainability of occupational pension promises and the protection of members and beneficiaries.
- Pension funds to conduct a standardised risk assessment to calculate the impact of common, pre-defined stress scenarios on their financial situation.
- Pension funds to enhance transparency through public disclosure of a market-consistent balance sheet and the outcomes of a standardised risk assessment.
- EIOPA recommends a proportionate approach to smaller pension funds through certain exemptions, the use of simplified methods and a lower frequency of risk assessments.
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