27 February 2008

IPE: EC to stage pensions assets enquiry

The European Commission is planning to hold a “broad-based enquiry” into the asset management of defined benefit pension funds, following pressure from DB pensions managers and concerning a threat which would oblige them to transfer assets out of equities and into fixed-interest securities.

The planned enquiry follows an earlier recent statement on the prospect of applying Solvency II-type rules to occupational pensions funds, by EC internal market commissioner, Charlie McCreevy, who said: “I have no intention of sponsoring proposals that would risk closing down defined-benefit pension schemes”.

The enquiry, which has yet to be formally announced, is expected to be planned during the next few weeks. It is too early to know details of the investigation, but an EC official told IPE such exercises can easily have duration of six months.

The issue worrying officials involved with defined benefit pension funds revolves around some crucial wording in Article 17 (par 2) of the “IORP” pensions directive (Directive on the activities of Institutions for Occupational Retirement Provision). The wording specifies the calculation of the margin, or buffer assets, required as a safety capital to absorb discrepancies between the anticipated and the actual expenses and profits. 

This rule relates to earlier rules given in the existing life insurance directive - Articles 27 and 28 of Dir 2002/83/EC - as those articles set out specific rules defining the assets necessary for that purpose, in relation to anticipated liabilities, and which should accommodate potential losses caused by fluctuations in the value of equities.

The application of these rules in the proposed Solvency II directive have been written primarily to protect capital adequacy in the insurance industry, but is also being discussed in relation to longer-term pensions assets.

Information is currently being gathered by the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) to establish how the different pension regimes work across the EU 27. CEIOPs is especially looking into defined benefit pension schemes, prior to reporting its findings before the end of March.

But behind the whole debate are strong feelings in two opposing corners. Regulators have indicated they tend to support prudential rules to protect future pensioners  while their opponents, from the industry, are seeking affordability in the real world.

For the regulators, Ieke van den Burg, a Dutch member of the European Parliament, has cited a need not just to regulate the use of bonds and equities in pension plans, but also “innovative products”.

Speaking at a Brussels conference, on defined contribution pensions, she said this should also apply to collateralized debt obligations, credit swaps, and other derivative financial instruments “where regulation is really necessary” but later told IPE the EU’s current pension regulation “is inadequate, in that it completely relies on national prudential rules and methodologies, which may create risky situations and regulatory arbitrage, seducing funds to the lightest regulatory regime”.

Speaking at the same conference, organised by the European Fund and Asset Management Association (EFAMA), Karel Van Hulle, the Commission official in charge of pensions, took a similar, if less drastic, line and argued pension plans must remain diverse and allow companies numerous ways to fund them. (see earlier IPE story: EC seeks pensions innovations, with guarantees)

“But, supposing you save all your life, and then on retirement you find that there is nothing in the pot. We need security in the system, and also transparency,” said Van Hulle.

One of the staunchest critics of any forced switch to bonds is Chris Verhaegen, secretary general of European Federation of Retirement Provisions, who welcomes the Commission plan to hold its enquiry.

“A rush to apply Solvency II would increase the cost of pensions to companies, provide lower benefits to retirees, and accelerate the trend of companies abandoning defined-benefit plans entirely in favour of defined-contribution plans,” said Verhaegen.

This latest development follows moves in the US by the Pension Benefit Guarantee Corporation safety net, to raise its investments in equities to 45%, which is approximately double the present allocation.

John Ralfe, former Boots pension fund manager and a consultant who advises RBC Capital Markets, noted the PBGC already has huge exposure to equities and has described its decision as “like a company which insures hurricane damage investing its reserves in beach front property”.

© IPE International Publishers Ltd.