05 October 2007

Solvency II could up pension costs by half, says EFRP

Implementing the Solvency II framework on pension funds could increase occupational schemes’ liabilities by as much as 60%, according to the EFRP. Speaking at the Irish Association of Pension Funds conference in Dublin earlier this week, Wil Bekkers, a board member of the Dutch Association of Company Pension Funds as well as director of EFRP, said while the framework is expected to be applied to insurance companies providing occupational pensions schemes, there is a concern it will also impact company-sponsored schemes operating under the IORP directive and significantly increase their funding liabilities.

“More and more people consider IORPs as just another financial institution and because of that they also argue the same regulations should be allowed but in our opinion, they should be different,” said Bekkers. “Solvency II is not about IORPs and pensions, it is so far about insurance. It is like Basle II for the pensions industry.”

“[If applied], many pension funds will be hit by Solvency II in Ireland, like the UK, Spain, and the Netherlands. In the case of Ireland, they face an increase in 40-60% of their liabilities or they will have to sell off all equity investments and raise their fixed income portfolio in order to minimise the risk. In other countries, it is less severe but still significant. The other impact could be defined benefit schemes will be transferred to DC schemes,” he continued.

Bekkers referred to a speech made by Henrik Bjerre-Nielsen, director general of Danish Financial Services and a former chair of CEIOPS, in which Bjerre-Nielsen said he believed Solvency II should also be applied to pension schemes.

However, Bekkers suggested there is significant disagreement across the European pensions arena about the advantages and disadvantages of applying Solvency II to schemes already following the IORP directive.

“[Under Solvency II], the risk will be shifted from the sponsors to the participants, and plan members will have less protection than today,” said Bekkers. “The extension will also have a negative impact on the economy. It might even threaten the development of occupational pensions. This could be particularly important at a time when governments are reliant on people making retirement provision for themselves,” he added.

More specifically, Bekkers pointed out any increased solvency requirement on pension funds may be unnecessary because occupational pension schemes can increase funding positions in ways not considered by the Solvency II framework.

“[Solvency II] fails to take into account the position of IORPs as it does not take into account the sponsors’ ability to raise contribution levels or the ability to shift pension benefits. IORPs are generally not-for-profit institutions, which means their plan members are not dominated by the interests of shareholders. There is no compelling argument to warrant a new solvency framework at this time. The IORP directive already contains stringent regulatory requirements,” he continued.

Bekkers said the EFRP is now working on a second position paper regarding Solvency II which is expected to be published later this year. He suggested, however, there is a need to development collective position between member states’ pensions bodies in order to ensure the any proposed new EU-wide policy actually matches its original aims.

“In our opinion the IORP directive needs more time to deliver its full potential. And with portability, the original aim of the directive was the transferability of pension accrual rates but that has been entirely lost in the process. What remains today is about vesting periods and preservation of rights. This is a good example of good intentions, bad work,” added Bekkers.

© IPE International Publishers Ltd.