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11 March 2013

EIOPA/Bernardino: How to ensure sustainability, strong governance and full transparency in occupational pensions

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In his speech, the EIOPA chairman gave an update on the action and initiatives of EIOPA related to the pensions area, and shared his thoughts on future opportunities.

EIOPA Advice on the IORP Directive Review EIOPA’s advice to the EU Commission can in fact be seen in the light of the above three main objectives: sustainability, strong governance and full transparency.

Let me start by sustainability, certainly the most controversial one... EIOPA supports the following principles for the valuation and capital requirements of IORPs:

  • Transparency i.e. the derivation of how a valuation was reached should be clear;
  • Comparability – it should therefore be possible to compare the valuation of one IORP’s liabilities with another, and likewise the value of the assets which support that liability;
  • Comprehensiveness – all potential security mechanisms (regulatory own funds, sponsor support, pension protection funds) as well as various adjustment mechanisms (conditional indexation, reduction of accrued rights) should be included in an explicit way.

Consequently, EIOPA recommends that valuations should be market consistent, that they should include the actuarial value of all enforceable obligations of the IORP and that there should be a risk-based solvency requirement.

I cannot provide you with any quantitative outcomes of the QIS exercise today... Although I will not present any numbers, I do want to make some observations. The QIS is in my view a first step in making the balance sheets of IORPs across Europe more comparable and transparent.

At the moment, pension liabilities are calculated using a variety of discount rates in different countries, like the expected return on assets, fixed discount rate or government bond yields. In the QIS all IORPs were expected to value liabilities on a market-consistent basis. Market consistency is an objective measure that provides a transparent view of the financial position of IORPs.

But, of course, market valuation is not without its challenges. That it is why, I think it is important that several adjustments to the risk-free interest rate were tested that take into account the long-term nature of occupational pension commitments. Participating IORPs had to test the so-called countercyclical premium and two versions of the matching adjustment. I think it will be worthwhile to further develop these long-term adjustments and tailor them to the specific features of IORPs...

The inconsistencies encountered during this QIS need to be carefully mapped, so that they can be improved upon in future QISs. I think that the next exercise can be considerable less extensive with regard to the number of scenarios being tested and provide better guidance and more simplifications. A less elaborate QIS will not only allow for a greater focus on quality – instead of quantity - but also for a greater number of IORPs to participate.

Secondly, EIOPA’s advice recommends a number of elements to reinforce the governance of IORPs. EIOPA advises that there should be a common level of governance principles and that Solvency II is a good starting point for further review of the IORP Directive.

Obviously, the importance of proportionality must be emphasised in this area. Robust governance is crucial for the members and beneficiaries of the occupational pension schemes. It is essential that those who run IORPs are individuals of competence and integrity. Therefore, they should be fit and proper and also IORPs should be subject to robust internal and external controls in areas such as risk management, internal control and audit, appointments of a custodian and a depository. Sound risk management practices including the performance of an own risk and solvency assessment are crucial for strong governance of IORPs.

Thirdly, EIOPA’s advice deals with transparency issues. EIOPA advises that the information in pension schemes should be correct, understandable and not misleading. For defined contribution schemes EIOPA believes that it will be useful to introduce a requirement of a pre-enrolment information document – the Key Information Document (KID). In particular, such a KID could contain information about the objectives and investment policies, performance, costs and charges, contribution arrangements and a risk/reward profile and/or the time horizon adopted for the investment policy.

I am convinced that this Key Information Document will be a huge step towards more transparency and confidence in the occupational pensions field.

Full speech


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