The
snags posed by solvency
Solvency regimes were top of the agenda at CEIOPS'
latest annual conference, writes Csaba Verga
The development of the new Solvency II regulatory framework for European
insurance companies has understandably been at the centre of activities
for the Committee of European Insurance and Occupational Pensions Supervisors
(CEIOPS) recently. However, solvency considerations are also essential
for the European occupational pensions sector– a fact brought into
a sharp focus by the financial crisis. Not surprisingly, therefore, the
question of solvency regimes was chosen as the topic for the pension panel
at CEIOPS' fourth annual Conference held
in Frankfurt-am-Main on 19th November, 2008.
All main stakeholder groups were represented on the panel – the
insurers, sponsoring employers, legislators and supervisors, as well as
the European Federation for Retirement Provision (EFRP). The presentations
and insights (a valuable contribution to CEIOPS' future work) very much
reflected the existing diversity of approaches to solvency regimes for
pension institutions.
The Conference
The chairman of the EFRP, Angel Martinez-Aldama, argued that Solvency
II was not an appropriate prudential regime for institutions with occupational
retirement provisions (IORPs). It had been designed with insurance undertakings
in mind, which differed significantly from IORPs. IORPs were not-for-profit
entities, with a very long-term horizon, social partners' involvement
and the support of a sponsoring employer. Any mechanical extension of
Solvency II to IORPs would not only have negative effects on financial
markets and the real economy, but it would jeopardise future defined benefit
(DB) provision as well.
The institutional and cultural differences in the occupational pensions
market remained substantial and it was unrealistic to look for a further
harmonisation of prudential rules in the short term. The EFRP accepted
that solvency rules for IORPs would be subject to further scrutiny, but
argued that the process should be properly prepared in line with the better
regulation agenda.
Jos Streppel, CFO and executive board member of Aegon NV, looked at the
topic from an insurer's perspective. In his view, the current Solvency
I regime, which may also be applied to some IORPs, was outdated. A modern,
economic and risk-based prudential framework for IORPs would be beneficial.
A new regulatory framework could apply the same principles as those that
underpin the Solvency II regime, while taking into account all the relevant
differences between IORPs and insurance undertakings, such as security
and adjustment mechanisms.
The interactions between the Member States' 'social' and the EU's 'market'
rules would need to be carefully considered. There was also need for a
common pensions terminology in Europe. Once such a common language was
in place, a full review of the IORP Directive should be made a priority
for the New Commission in 2010.
Solvency capital
A sponsoring employer's view was presented by Dr. Withhold Galinat, head
of international benefits for BASF SE. Dr Galinat quoted the Allianz Global
Investors and OECD study ("Evaluating the impact of risk based funding
requirements on pension funds") to illustrate a possible dramatic
increase in solvency capital requirements for IORPs, if Solvency II quantitative
rules were to be directly applied. DB plans with 100% funding level under
the International Accounting Standard 19 (IAS 19) would only be about
64% funded. This would mean a €36 billion underfunding in the case
of the German Pensionskassen alone.
The reasons for such a dramatic increase in solvency capital requirements
were manifold and common to all IORPs: long term liabilities; a homogeneous
product with longevity risks not hedged by mortality risks; the availability
of the employer's backing; the tension between market based valuations
and an IORP's need for a long term investment strategy.
A dramatic increase in capital requirements for IORPs would make sponsoring
employers seriously question whether it was worth their while to continue
to provide DB occupational pensions. The way forward for any future review
of a solvency regime for IORPs was to focus on qualitative aspects, such as the strengthening of risk management
processes, with any proposals for higher capital holdings properly balanced
against the socio-political implications for the sponsoring employers.
Brendan Kennedy, chief executive of the Pensions Board in Ireland and
member of CEIOPS' Occupational Pensions Committee, who spoke for CEIOPS,
admitted that any attempt at harmonising solvency regimes for IORPs would
not be straightforward. There were currently 27 national pension systems,
27 different expectations and 27 national supervisory approaches to be
reconciled. A number of important questions would need to be answered,
such as: what is the right balance between costs and risks; what is the
right balance between subsidiarity and convergence; and where should one
place a demarcation line between cross-border and domestic pension provision?
Until all the different expectations were properly understood, there could
be no common answers.
While acknowledging that an effective prudential regulation and supervision of occupational pensions were crucial to EU economic and
financial stability, the panelists pointed out that it would be inappropriate
to limit the debate to solvency matters alone. With pressures on state
pensions increasing, it was also important to consider effective ways
of increasing occupational pensions coverage from the current 50% of the
EU working population.
It’s not just about solvency
With the 2008 conference over, it is back to business as usual at CEIOPS.
The work programme for 2009 is ambitious and occupational pensions work
is no exception. In line with its overall objectives, CEIOPS will continue to focus on
the exchange of information and supervisory co-operation among its Member
Authorities in order to enhance convergent supervisory practices. There
will be three strands to this work: an experience based review of the
Budapest Protocol; a follow up to the recommendations of CEIOPS' report
"Initial review of key aspects of the implementation of the IORP
Directive"; and further work on pensions and solvency.
The review of the Budapest Protocol which lays down general principles
for supervisory cooperation in relation to cross-border IORPs, will be
finalised towards the end of 2009. The purpose of the review is to update
its current provisions for the notification procedure and the on-going
supervision in the light of experience. The revised protocol will also
include a new section on the handling of cross-border consumer complaints.
The follow up to CEIOPS' report on the implementation of the IORP Directive
will focus – in line with the report's recommendations – on
further analysis and clarifications relevant to IORPs operating cross-border.
Pensions and solvency work will be aligned with the outcome of the Commission's
consultation on the harmonisation of solvency rules for IORPs covered
by Article 17 of the IORP Directive and those operating cross-border,
which is currently under way. CEIOPS will continue to monitor developments in cross-border occupational
pensions market and will publish a 2009 update in the second half of the
year.
In response to the growing interest in effective risk management and internal
control practices, CEIOPS will undertake two surveys in 2009. One will
map out and analyse existing legal frameworks and practical approaches
to risk management in IORPs, the other will analyse existing internal
control mechanisms applied by IORPs.
In the course of its work on occupational pensions matters, CEIOPS has
become aware of European institutions or schemes that provide pensions
in the occupational environment but are neither covered by, not explicitly
excluded from the scope of the IORP Directive. Through a brief mapping
exercise, CEIOPS will identify these pension schemes, assess their importance
in the national pension systems and cover them in its future workstreams
as and when appropriate. All in all, it promises another busy year ahead!
WRITTEN BY CSABA VARGA, DIRECTOR GENERAL OF THE HUNGARIAN FINANCIAL SUPERVISORY AUTHORITY & MEMBER OF THE MANAGING BOARD, CEIOPS
