DG MARKT’s Director General, Jonathan Faull: IORP Directive must account for past pensions promises

06 March 2012

A clear distinction between past and future accruals should be made before applying solvency measures to cross-border pension funds, as more rigorous rules would be "financially unsustainable", according to Jonathan Faull.

In his closing remarks at a recent public hearing on the revised Directive on Institutions for Occupational Retirement Provision (IORP) in Brussels, Faull warned that the past "could not be ignored" for defined benefit (DB) pension schemes. "Pension promises have been delivered in a manner that, for different reasons, has undervalued the real cost of the pension promise", he said. "If we were to apply more rigorous rules to the back book of the pension funds, this would most likely be financially unsustainable."

Faull said a solution to this problem had to be found before implementing any risk-based solvency rules for IORPs. He also pointed out that many companies have moved away from DB plans towards defined contribution (DC) schemes. "Undertakings have clearly realised they can no longer afford defined pension promises, as the returns on investments go down and people live longer, which of course is a very positive development, but which unfortunately results in higher liabilities and thus higher costs for occupational pension funds and rising costs for health services", he said.

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