The current review by the European Commission of the Directive for pension funds - the IORP Directive – is more important to the UK than any other European country.
The UK accounts for 52 per cent of the EU’s pension assets in autonomous pension funds, followed by the Netherlands with nearly 25 per cent. No other country has more than 5 per cent of the total. On October 25, the European Insurance and Occupational Pensions Authority (EIOPA) issued a 517-page document. This is their draft full response to the Commission’s March 2011 request for technical advice on improving the EU’s regulatory regime for defined-benefit and defined-contribution pensions. In the draft, EIOPA requested the views of stakeholders on 96 questions by January 2, 2012. The commission is considering how to apply the Solvency II Directive for insurers to pension schemes. UK stakeholders including the National Association of Pension Funds and Confederation of British Industry do not like this idea at all.
The stakeholder criticism of Solvency II relates to how defined-benefit scheme liabilities are valued and the impact that a change could have on employer costs. Their concern is that a typical scheme’s liabilities under a Solvency II regime could increase by as much as 40 per cent with a further 50 per cent as a risk buffer – and that employers would have to put up more cash accordingly. This is an actuarial view of the problem that tends to confuse the issue. An adapted Solvency II regime would not change the liabilities at all: it measures them with a different ruler. The 40 per cent part of the increase is the difference between a “funding” valuation of the employer’s liabilities and a “solvency” valuation for the scheme. The funding valuation is used to calculate how much the employer needs to put into the scheme, assuming that the investment strategy delivers the expected returns.
The solvency valuation does not anticipate these extra investment returns. It calculates the market value of a risk-free portfolio of maturity-matched assets that a scheme would need today to meet the estimated benefit payments in the future. This method has been around for years, underpins the Dutch FTK regime and is already calculated and reported to members by UK DB schemes. Solvency II also adds two further asset amounts that need to be held as risk buffers: one to cover the risk of members living longer than currently assumed, and a second to cover investment risk if the investments held are not (a) risk-free or (b) maturity-matched.
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