The European Commission continues to endanger UK pensions provision
I have some good news, and some bad news. As I outlined here in July, the TUC (and virtually every other stakeholder group) opposes the European Commission’s plans to revise its directive on institutions of occupational retirement provision (or ‘IORPs’, more commonly known as funded defined benefit pension funds).
Plans for a quantitative impact study (QIS) based on the proposed revisions, which would have seen pension funds come under the same regulatory regime as insurance companies, were consulted on by the European Insurance and Occupational Pensions Authority (EIOPA) over the summer. EIOPA issued its verdict on the consultation responses earlier this month – and actually pleased many stakeholders by appearing to have listened to our concerns.
But this goodwill has all but evaporated after a forthright speech by EIOPA chair Gabriel Bernadino at the NAPF conference this week.
EIOPA’s response to the consultation, while falling short of rejecting the Commission’s proposals, was welcomed because it outlined exactly what the limitations of its QIS exercise are:
It is EIOPA’s view that there are still a number of issues which have not yet been resolved, and which cannot be resolved within the time allowed for this QIS. The issues that have not been examined at all in this QIS include:
- Supervisory responses (including recovery periods)
- Multi-employer IORPs
- Expenses borne by employers
The issues about which EIOPA’s view is that further work is needed include:
- Sponsor support
- Pension protection schemes
- Confidence levels at levels other than 99.5%
- Parameters and correlation matrices
- Minimum capital requirement (MCR)
- Long-term guarantees
- Risk margin
- Pension scheme / contract boundaries
- Segmentation of pension obligations
- Discretionary benefits
- Level B expected returns
- Proportionality (especially, since this section was condensed)
The introduction to the consultation paper noted that an important objective of the QIS was for IORPs and supervisors alike to explore the practical application of the new type of supervisory regime. The QIS represents the first impact study for IORPs and covers a very broad range of issues that are in many respects new concepts for all involved. So, undoubtedly, during the QIS exercise issues will surface and areas for improvement will be identified, which will need to be taken on board on future occasions.
Therefore, this QIS is not a complete assessment of the practicality of the holistic balance sheet, and further modelling will be needed. However, EIOPA is continuing with this QIS under the assumption that further QISs will be undertaken.
To cut a lot of technical jargon short: virtually every key aspect of the proposed changes, in particular the ‘holistic balance sheet’ approach and capital requirements, needs a lot more work. EIOPA has consistently referred to the current QIS (now underway) as ‘the first QIS’ – apparently in contrast to the Commission, which wants the new directive signed off by summer 2013.
But Bernadino’s comments at the conference set out a much more robust defence of the proposed IORPs directive than suggested by EIOPA’s official communications.
His speech put forward the now familiar view among EU bureaucrats that pension funds across Europe need to become more ‘sustainable’ in light of increased life expectancy. However, this does not mean that it is the job of EU institutions to provide for this sustainability. Simply, pensions reform of this type is outside the European Commission’s remit.
Bernadino knows this, which is why he restated EIOPA’s ‘main objective’ is to facilitate cross-border pensions provision by developing ‘common standards’ across the EU. There is of course no evidence of any appetite for cross-border provision, yet nevertheless, the move towards common standards is not itself problematic. The problem is what those standards are composed of.
The proposals go much further than developing a common standard of regulation. If implemented, they would radically transform the supervision of pension funds in countries that rely on funded occupational pensions. This may or may not be necessary in some cases – but attempting to apply the same framework to countries with very different pensions system is a recipe for disaster.
The speech made no attempt to justify why the European Commission or EIOPA is best placed to regulate the UK pension system. Even if his diagnosis of the system’s problems, and his prescriptions for how to change it, were absolutely correct – which they are not – this alone is not a justification for supplanting the proper role of national-level authorities.
In further comments reported by the Investment & Pensions Europe website, Bernadino sought to present EIOPA as the heroic saviour of defined benefit provision across Europe, striving to protect occupational pensions precisely because national governments have failed in this task. “The reality right now, especially in your country, is that defined benefit is killed. If we can, from a supervisory perspective, create conditions to help the sustainability, again from the supervisory perspective, then we are really doing a great job.”
It is easy to see why some stakeholders have been troubled by this apparent mindset. UK pension funds have told EIOPA that it is the Commission’s proposals, not the Commission’s failure to act in this area, that will ‘kill’ defined benefit pensions.
Bernardino is convinced however that EIOPA knows best:
What I am trying to say is, have some trust in what we are doing. We are not a bunch of lunatic, crazy guys in Frankfurt, OK? We know about pensions. We know about the reality of pensions.
Only time will tell. But the key point is that we should not have to decide whether we trust EIOPA or not (not to mention the fact that EIOPA itself clearly does not trust the European Commission). Introducing a hugely ambition programme of reform which will affect millions of pensions savers in the private sector, under the cover of regulating a very limited cross-border market, cannot be justified.