Rise of a Pin 001

shutterstock_154809119The Wizard of EIOPA is back. Gabriel Bernardino, the chairman of the European Insurance and Occupational Pensions Authority (EIOPA), outlined in May the powers he thought were necessary for EIOPA to enhance its role as a European Supervisory Authority for the insurance market. Insurers are currently busily opposing such calls.

On 5 September, therefore, he changed tack with a speech about pensions instead, entitled Creation of a sustainable and adequate pension system in the EU and the role of EIOPA.

“The creation of an adequate, safe and sustainable pensions system is one of the key objectives of the European Union and EIOPA is committed to contribute by all means to the development of such a system,” he boomed, despite the EU’s Constitutional Treaty not mentioning pensions anywhere among its objectives. He went on to state that EIOPA approved of assets and liabilities being valued on a market consistent basis. So far, so uncontroversial.

But then he continued. “EIOPA suggested a number of elements to reinforce the governance of IORPs: for example the performance of an own risk and solvency assessment.” What? An ORSA? You mean that thing that has led the insurance industry to spend millions on consultants, conferences and which, 5 years on from when it was first mooted, is only currently fully implementable by 24% of European insurers with all of the resources available to them? (Moody’s Analytics, in their July 2013 survey of 45 European insurers, concluded that 24% of the insurers interviewed had their processes, methodologies and models in place to fulfil Pillar 2 requirements – the key one being the ORSA).

He wasn’t finished. EIOPA proposed to require defined contributions (DC) schemes to produce a Key Information Document (KID). This would contain “information about the objectives and investment policies, performance, costs and charges, contribution arrangements, a risk/reward profile and/or the time horizon adopted for the investment policy”. So, a massive amount of additional bureaucracy around the default funds in a DC scheme by the sound of it, with no appearance of understanding that members of DC schemes can choose their own investment policies, nor a word about the hottest issue in DC provision at the moment, ie the level of charges. Surely he is KIDding?

Next he carried on a bit about the “holistic balance sheet” concept, despite it having recently been kicked into the long grass for implementation by pension schemes he clearly desperately wants to bring it back if he can, before giving his interpretation of the findings of the quantitative impact study (QIS) as part of the process to advise the European Commission on the review of the IORP Directive. This boiled down to:

  • Some pension schemes have surpluses, others have deficits.
  • Schemes can either make up deficits by paying more contributions (“It is not unusual that future sponsor support needs to cover as much as 25% of liabilities.” Said the Wizard, with the air of a man discovering a new physical law) or by reducing benefits.

I think we can all agree that however much the QIS cost it was worth the money.

Then we moved onto the Swedish part of the speech. “I would like to take this opportunity to thank the Swedish pension industry, the Swedish pension protection scheme (PRI Pensionsgaranti) and the Swedish supervisor (Finansinspektionen) for their contributions to the QIS. Sweden was the only member state with sufficient financial assets to cover the pension liabilities as well as the solvency capital requirement. Pension funds showed on average even a substantial surplus over the SCR of 13% of liabilities. Of course, an important reason for these positive outcomes is that Sweden already imposes a prudential regime that is market consistent and risk based, by using the quarterly Traffic Light stress test. In my view, this clearly illustrates that a future European regulatory regime should be market consistent in order to ensure a comparable and realistic assessment of the financial situation of pension funds; and risk based in order to provide IORPs with the right incentives for managing risks.”

What? According to the Swedish Pension Agency’s annual report on the Swedish Pension System for 2012, it consists of a pay-as-you-go scheme (the inkomstpension) and effectively an insured personal pension (the premium pension). So it clearly illustrates precisely nothing for a defined benefit occupational pension system like that of the UK with total buy out liabilities of around £1,700 billion (according to the UK Pensions Regulator’s Purple Book for 2012). However, did I mention where this speech was taking place? Sweden.

It was time for the Wizard to return to building his empire. EIOPA need more resources, more powers and now, apparently, more of a mandate. Obviously the m-word is a bit of a problem for all European institutions but it grates on the Wizard particularly. Despite the Solvency II omnibus grinding along on the hard shoulder and the first attempt at new funding targets for occupational schemes being rebuffed, he believes that now the time is right for a foray into personal pensions. He refers to occupational pensions as “the so called 2nd pillar” which confused me at first as I thought that was the risk management part of Solvency 2. However, then I realised that it was just that Eurocrats are obsessed with pillars because now he is calling personal pensions “the so called 3rd pillar”. And he wants to run them with the same efficient competence we have come to associate with the Wizard.

The Wizard wants a new sort of personal pension known as an “EU retirement savings product”. This would avoid “the traps of the short term horizon” (ie pesky scheme members deciding they need their money earlier than EIOPA decree they can have it) and “managed using robust and modern risk management tools” (does he mean things like the stochastic techniques and Value at Risk methodologies which have shown no discernible ability to manage risk in banks to date?). Finally “it should have access to a European passport allowing for cross border selling”. There has been scope for UK occupational pension schemes to become cross border schemes for some time now. Hardly any have taken up this “opportunity” so far because it came with a requirement to immediately increase the level of funding of a defined benefit scheme to buy out level. For defined contribution schemes, as we saw with the fate of stakeholder pensions, the appropriate vehicle very much depends on the form of social security system in place, the degree of means testing and when it happens and, most importantly, how it interacts with the state pension system. One size will definitely not fit all, and I expect that the Wizard’s EU retirement savings product will remain a largely theoretical entity for this reason.

However, my favourite part of the Wizard’s speech was left until last. “It is our collective responsibility to face reality,” he offered, with no hint of irony. I fear that the Wizard’s sense of reality is more a type of magical realism where people can fly, or turn into unicorns and EU officials can regulate things they don’t understand without unintended consequences.

“Please help us to move in the right direction,” he concluded. I think we should all do precisely that, by opposing what the Wizard of EIOPA proposes for pension schemes of all kinds.

Lawyer attack adThe Advertising Standards Authority (ASA) has decided that no action will be taken against the Law Society as a result of their Don’t Get Mugged campaign, which ran during July and August. The advert encouraged accident victims to seek legal representation from solicitors rather than rely on a third-party capture offer from an insurer. The ASA considered that it neither denigrated insurers nor was likely to distress victims of actual muggings.

What this campaign does appear to do is open the door to professionals attacking each other overtly in their advertising (what US presidential candidates call “going negative” with “attack ads”) in their desire to get more business from the public. Supermarkets have done this from time to time, but it is relatively rare elsewhere. I still remember the Dillons advert from the eighties aimed at its main competitor, Foyles, (Foyled again? Try Dillons) because of its rarity. However it looks like we may be about to see a lot more of it. Will this give rise to insurers and banks going at it with independent financial advisers even more loudly over the level of independence of the advice being received, or solicitors and licensed conveyancers escalating hostilities? Will this help informed decision making by anyone? I somehow doubt it.

It seems unlikely that solicitors will turn the same type of emotional manipulation on each other any time soon, as the Solicitors’ Regulatory Authority sets out as one of its principles that solicitors should “behave in a way that maintains the trust the public places in you and in the provision of legal services”. So that leaves the field clear for other professions to get in there. I would suggest something like this (add the name of your profession as appropriate):


Let the games commence!

shutterstock_139285625When the GCSE results came out the other week I had a special reason to be interested as my daughter Polly was one of the anxious students waiting for them. As it turned out, she did very well, but I ended up listening to news coverage of the event which perhaps ordinarily I would have missed.

And how obnoxious it was! Despite a reassuring increase in students taking the more difficult subjects, and pass rates at all grades statistically no different from the previous year (nearly every media outlet seemed to report a drop, once again the direction deemed more important than the amount). Unless the numbers go up every year, apparently, none of us are happy.

When the steam (or hot air at least) had run out of these criticisms, people of my age seemed to be queuing up to appear on radio stations to tell today’s students that what they lacked was something called “grit”. We need to introduce a GCSE in Grit, they cried.

Grit. Really? This is the generation which has not had the grit to adequately tackle any issue which threatened the immediate earnings of the already rich and powerful, like climate change for instance, or a just tax system, either globally or even nationally.

But they are right in a way, because a generational war has been declared and the sooner today’s students wake up to this the better. We are not all in it together. The labels of “baby boomer” or Generation X, Y and Z are there to put us into economic camps (definitions vary, but I, at 50, am somewhere on the boomer-X boundary apparently, my children are Y and Z, or both Z, depending on the point someone is trying to squeeze out of the data). When they stumble out into the job market, today’s students risk having insufficient qualifications (because even when the numbers do all go up, employers cry “grade inflation” and pull up the drawbridge even further) for anything but a McJob, on zero hours contracts, or nothing at all, subject to youth curfews, ASBOs and acoustic dispersal devices. If they are lucky enough to be graduates they will have, in addition, a loan of at least £40,000 to repay. If they want to rent somewhere to live, they will be victim to an insufficiently regulated private rental market. If they want to buy, they are highly vulnerable to a property bubble being inflated for all its worth by George Osborne. It would be hard not to conclude that the rest of society had declared war on them while they were preparing for their gritless exams.

Meanwhile, the sense of entitlement amongst the boomers is frequently drowning out any other voices. Low interest rates are bad because they “attack” pensioners’ savings, and make annuities more expensive for those about to become pensioners. However this is just special pleading for one generational group. Low interest rates are good for making the Government’s money go further, and for spending on other priorities than the boomers.

Similarly high inflation is bad news if you’re a pensioner, and if your pension, as most are where the pensioner had a choice, is not inflation-linked. However, provided it is accompanied by earnings and economic growth, ultimately it is how a deficit burden, both private and public, is going to be shrunk most effectively.

The last thing Ys and Zs need is another 50-something lecturing them on what to do, but my plea would be that they don’t let these arguments be lost by default. The battle lines have been drawn. And I know which side I’m on.