All panelists agreed that the single biggest event affecting funded pensions was the financial crisis. Although pension funds have weathered the short-term impact of the crisis well, the crisis has also brought home a number of questions about sustainability and affordability.
The pensions panel, chaired by Tony Hobman, Chief Executive of the Pensions Regulator UK and the outgoing Chair of CEIOPS Occupational Pensions Committee, looked at developments in funded occupational pensions over the last year or so. All panellists agreed that the single biggest event affecting funded pensions was the financial crisis. Although pension funds have weathered the short-term impact of the crisis well, providing a stabilising effect for the financial markets in the process, the crisis has also brought home a number of questions about sustainability and affordability that need to be addressed in the long term. A holistic view of pensions is needed, taking into account the social role played by them, including the differing nature of occupational schemes in Member States and the differing degree of reliance placed on these schemes by Member States.
Willem Handels, Consultant on Pension Strategy for Shell Pension Bureau Nederland BV, presented a state-specific perspective on the impact of the crisis on occupational pensions. The Netherlands operate a well funded occupational pension system, predominantly of a defined benefit type. There are 700 funds, some very large, governed by extensive legislation. This contains a risk-oriented solvency framework based on a marked-to-market valuation of asset and liabilities. Systems of governance are also well developed. However, like everywhere else, the financial crisis brought with it substantial falls in asset values and interest rates. These have resulted in the funding ratio for many pension schemes falling well below the required statutory minimum. Flexibilities built into the regulatory framework were activated by the supervisor: recovery periods were extended, employer contributions increased, indexation cut and strategic asset allocation re-thought. The solvency framework came under scrutiny, with broad discussions on its sustainability and the risks faced initiated at the regulatory, supervisory and industry levels.
Patricia Plas, Senior Vice President, Public Policy & Regulatory Affairs at AEGON NV in Belgium, argued that now was a good time to think about the future of pensions, both occupational and personal. The Lisbon Treaty will be implemented from 1 December 2009 and with it the Lisbon agenda reviewed. Soon there will be a new Commission with CEIOPS already emerging as a major player. The IORP directive is a starting point, but other ingredients need to be considered as well; the new Solvency II framework and what it means for pensions; the employer insolvency directive; the draft portability directive; the flexicurity concept; and the open method of coordination initiative. A common language for pensions is needed and, taking a holistic approach within the different Directorates of the Commission, joined-up thinking is of paramount importance. The social and market disconnect in the approach to pensions needs to be addressed, with the objective of not removing the existing diversity, but of managing it. Post-crisis pension systems need to be sustainable, adequate and modern. They need to be transparent and comparable, using a common language and the same valuation methodology. The New Commission and CEIOPS, as well as its successor EIOPA, have an important role to play in developing such systems for the future.
Angel Martinez-Aldama, Chairman of the European Federation for Retirement Provision and Director General of Inverco, Spain, observed that the crisis taught us an important lesson: a risk-free society does not exist. Risks exist for everyone and need to be well understood and managed. Institutions for Occupational Retirement Provision (IORPs) managed their risks well during the crisis, while acting as important market stabilisers in their role as institutional investors. Effective use of flexibilities built into defined benefit regulation and supervision helped protect members’ benefits. However, members of defined contribution schemes who were close to retirement when the markets fell suffered detriment. In terms of risk management going forward, a multi-pillar approach to pension provision should continue so that risks for the state, the industry and the individual continue to be diversified. Any new funding requirement for defined benefit pensions should carefully balance the needs of members and those of the sponsoring employers. Solvency II capital requirements are not an answer, as the Commission’s consultation and their Public Hearing earlier in the year showed. Managing defined contribution risks requires an increased focus on financial education, as well as putting in place new risk mitigating hybrid designs and default options.
Hover over the blue highlighted
text to view the acronym meaning
over these icons for more information
No Comments for this Article