21 April 2013

FT: EU pension proposals alarm local schemes

According to a calculation methodology derived from the Solvency II regime due to be imposed on insurance companies, Sweden’s workplace-based defined benefit schemes typically boast a surplus of assets over liabilities of 13 per cent. By contrast, in Ireland there is a deficit (or “negative surplus”) of between 81 and 93 per cent.

“The results demonstrate that the impact of applying a Solvency II-style regime to pensions could be huge”, says Jane Beverley, head of research at Punter Southall, a consultant. “[It] should lead [the European Commission] to question whether the policy should be abandoned altogether, especially given the growing chorus of opposition from the UK, Netherlands, Germany, Ireland and now Belgium.”

This quantitative impact study (QIS), drawn up by the European Insurance and Occupational Pensions Authority at the behest of the commission, forms part of the groundwork for a proposed revision of the 2003 Institutions for Occupational Retirement Provision Directive. But whereas the original IORP Directive merely laid down minimum standards for the funding of occupational pension schemes, its more demanding successor would calculate pan-European solvency figures on a common and consistent basis, presumably with the aim of forcing those that come bottom of the class to buck up their ideas.

The QIS also adds an additional explicit risk margin, essentially the additional capital a third party taking on the liabilities would need to hold to cover risks that cannot be hedged. Further, the QIS insists on a solvency capital requirement, essentially a buffer against extreme events. The latter typically benefits from significant support from strong corporate sponsors as well as access to contingent assets and the safety net of a pension protection scheme.

At this stage, the significance of the findings remains unclear. The Commission has yet to make any firm proposals, but having come this far through the process, it seems unlikely it would shy away from attempting to force pension schemes to close the funding gaps the analysis has identified.

Ms Deborah Cooper, retirement partner at consultancy Mercer, is not alone in warning of the potential consequences of such legislation. “Requiring companies to fill these deficits would bankrupt some companies, so pension scheme members would not get their benefits anyway and maybe they would not have their jobs”, she says.

Full article (FT subscription required)

© Financial Times