On 9 April, the European Insurance and Occupational Pensions Authority (EIOPA) published the preliminary findings of the quantitative impact study on its proposed changes to the Institutions for Occupational Retirement Provision Directive (or IORP II as some have started to call it). That sentence might not mean much to many people. But once you understand that EIOPA is the pensions regulator for the whole EU and that IORP is the European word for pension scheme you will probably be expecting bad news. And you would be right.
The study showed that the combined deficits of the 6,432 defined benefit pension schemes in the UK as at 31 December 2011 would have increased from £300bn (the UK Pensions Regulator’s calculated figure) to £450bn (based on methodology designed to bring pension funding more in line with insurance company reserving).
The National Association of Pension Funds warned that this move would put a “huge burden” on remaining UK defined benefit pension schemes and the businesses that run them. Steve Webb warned that “The EU’s latest figures show the extremely high cost its plans would place on UK defined benefit pension schemes.”
Others were less positive about the proposed changes.
However, I am reminded every time this story is reanimated by the latest stage in the unending dance of death of the European insurance and pensions legislative process, of the line Tom Cruise uses in Mission Impossible to calm objections to his scheme to break into CIA Headquarters. It really is much worse than you think.
IORP II was set in motion with 3 main aims:
- to make cross border schemes more widely used (which are avoided by most UK employers as they require an immediate increase in funding level in most cases);
- to create a level playing field between pensions and insurance; and
- to make sure that this level playing field includes a common supervisory system at EU level which is risk-based.
Which all adds up to a lot more than just a new funding requirement.
Therefore, quite apart from any proposals on extra funding, in over 500 pages of advice to the European Commission last year, EIOPA recommended:
- The same governance requirements for pension schemes as for insurers. Getting governance and the documentation of it right has and continues to be a challenge for insurers with all of the resources available to them. Can trustees of pension schemes realistically be expected to do the same?
- Fit and proper requirements for pension scheme trustees equivalent to the requirements of boards of insurance companies. The implication is that the current trustee toolkit might not cut it any more. Might this mean the end of the non-professional trustee?
- Similar risk management requirements for pension schemes to those of insurers. This would include the possibility of pension schemes needing to set up contingency funds for “operational risks”, eg errors made in administering the scheme that might lead to losses, for the first time.
- The requirement to conduct an Own Risk and Solvency Assessment (ORSA) for pension schemes. Again, these are very demanding exercises for insurance companies who have whole departments devoted to conducting them.
I could go on. Unfortunately the one thing that is certain is that EIOPA will go on. They have demonstrated through the tortuous nature of the process to date that their tolerance of bureaucracy is almost unlimited. There is a principle of proportionality referred to in the recommendations, which is supposed to mean that no organisation has requirements foisted on it totally out of proportion to the risks it poses to the financial system, but this has yet to be properly tested.
My fear therefore is that what we might have assumed would be regarded as unreasonable requirements of groups of mainly volunteer trustees trying to look after member benefits in their pension schemes will be viewed by the European institutions who will vote on these recommendations as nothing of the sort.