Solvency II is good for pensions


The pension fund industry is up in arms over proposals to introduce Solvency II style regulation for occupational pensions. But Michaela Koller, Director General of Insurance Europe, argues that Solvency II will ensure consumers receive similar levels of protection for similar promises – irrespective of the institution providing the pension. In its recent White Paper on Pensions, the European Commission set out the laudable aim of enhancing the role of private retirement savings. The plans include improving the safety of occupational pensions by reviewing the regulatory framework and scheme design. Insurance Europe supports the Commission’s review of the EU’s Institutions for Occupational Retirement Provision (IORP) Directive and its aim of promoting a true European single market for pension providers and beneficiaries. The current prudential regulatory framework for occupational pensions is incomplete and inconsistent across the EU. Occupational pensions are subject to significantly different regulations, depending on who provides the scheme: Life insurers (significant providers of occupational pensions) are regulated under the Life Insurance Directive and will be required to comply with Solvency II, when it comes into force. IORPs are regulated under Article 17 of the IORP Directive, and are currently required to hold Solvency I capital requirements. These IORPs are the ones where the institution itself, and not the sponsoring undertaking, underwrites biometric risk or guarantees a given investment benefit. Meanwhile cross-border pension funds regulated under Article 20 of the IORP Directive must be fully funded, with national legislation defining the calculation of the value of the pension liabilities. And other types of IORPs are subject to minimum harmonisation, fully based on national frameworks following the prudent person principle. We believe that — while still respecting specific national characteristics — those prudential differences should be removed to ensure transparency, consistency and stability. The current IORP Directive includes a high level of flexibility and is therefore implemented differently across EU member states. Furthermore, its valuation and capital requirements are not sufficiently sensitive to risk. For instance, when an IORP decides to increases its risk appetite and change its investment policy from government bonds to shares, there is no effect on its capital requirements. Solvency II, on the other hand, will apply much stricter valuation and regulatory capital requirements reflecting such risks. It is also worth noting that while pension funds and insurance companies providing occupational pensions are not similar entities, there are some clear parallels between the two sectors. Both often offer similar products to their beneficiaries and are frequently in direct competition. We believe that the review of the IORP Directive should result in consumers receiving similar levels of protection for similar promises, irrespective of whether they are members or beneficiaries of an IORP or of an occupational pension scheme provided by a life insurer. A package of measures is currently being developed under Solvency II to ensure that the regulatory principles of the new regime for insurers are suitable for long-term guarantee products. These solutions should then serve as the framework for ensuring comparable and high levels of policyholder protection for pension investments, whether offered via a pension fund or an insurance company. The Solvency II framework has sufficient flexibility to be able to capture the risk profile of each pension scheme and IORP. Despite the dire warnings of the pension fund industry, it has never been the intention of the Commission to “copy and paste” the Solvency II regime wholesale onto IORPs. The intention is to apply the principles of Solvency II, taking appropriate account of any economically significant differences between the different providers, such as the treatment of a sponsor’s covenant (where the employer promises to finance any pension scheme shortfall) or the ability of a pension scheme to reduce future benefits. The idea that the risk-mitigating nature of off-balance sheet items such as sponsor covenants and guarantee funds can be taken into account in the solvency requirements has clearly not been understood by many of those involved in the debate over the review of the IORP Directive. EIOPA proposed in its February advice to the Commission a “holistic balance sheet” approach to capture all the existing security mechanisms in a single framework. This would base the capital requirements on the economic balance sheet as used for Solvency II while also including IORPs’ security mechanisms. Obviously the detailed rules for IORPs need to be carefully worked out. Insurance Europe fully supports EIOPA’s commitment to carry out a thorough quantitative impact assessment (QIS) this year. But we hold by the following core principles for the EU-wide regulation of occupational pensions:
  • Similar risks must be covered by similar rules, offering similar and adequate protection.
  • Financial institutions that provide occupational pension products must be regulated according to those products, not on the basis of the legal vehicle through which the products are sold.
  • Any economically significant differences between insurers and IORPs should be properly taken into account.
The advantages are clear. The adoption of Solvency II principles for IORPs would ensure adequate protection of beneficiaries, independent of the provider. It would also reduce the risk of taxpayers being asked to bail out failed pension funds by ensuring that funds are all capitalised to a uniform minimum standard. Solvency II principles would also provide a level playing field with insurers and remove the scope for regulatory arbitrage. Finally, they would increase citizens’ confidence in the pension industry and help facilitate the single market. The EU single market should be about more than just removing cross-border obstacles. It is also about fighting unjustified cases of unequal regulation and ensuring EU-wide minimum standards of consistency and transparent information. The Commission must therefore take steps to avoid regulatory arbitrage. — The author is the Director General of Insurance Europe. The views expressed are the author’s own.  ]]>