With financial risks and regulatory challenges having intensified as the global economic crisis has unfolded, European Member States are working together to protect members' benefits. As regulators and supervisors of Institutions for Occupational Retirement Provision (IORPs), we seek to apply principled strategies for managing risks, remaining sensitive both to the short-term impact of the current downturn and to longer-term trends. By securing a collective view of the European pensions landscape as it evolves, we have sought to focus our responses in a way which recognises the benefits of convergence but also has full regard for the importance of Member States' national prerogatives and social and labour legislation.
The impact of financial instability
Inevitably, the financial crisis has had a detrimental impact on pension schemes across Europe. A recent OECD report showed that in October 2008 the total assets of pension funds in OECD countries had declined by about 20 per cent, almost $3.3 trillion from December 2007. In our regulatory discussions in Europe there is real concern about these short-term effects as well as the longer-term impacts. The inherently long-term nature of the product does give IORPs and their members the scope to make long-term investment choices and thus to better ride out periods of market instability.
However, falling markets have directly impacted on asset values and therefore, in the defined contribution space at least, scheme members nearing retirement can be faced with some tough financial decisions. This highlights the importance of good quality communications to them about the issues they might be confronting and the choices open to them.
Increased flexibility and risk management
In the context of defined benefit (DB) schemes, there are a number of security mechanisms already in place providing protection for members and beneficiaries. Although they may vary in nature and number from state to state, these include reliance on solvency buffers, further contributions, employer covenants, flexibility in conditional rights, recovery plans and guarantee schemes.
Whilst we see differing usage of and reliance on these mechanisms across Member States, common approaches in response to the downturn are emerging from supervisors. There has, for example, been an increased focus on the flexibilities within the current framework, provided by the IORP Directive, and the tools available to pension funds. DB pension schemes in many states have been given more time to analyse their current situation and have been allowed greater flexibility over the design and length of recovery plans. Closer communications and increased reporting are also seen by many states as key in ensuring that risks are appropriately monitored and managed.
As highlighted above, for defined contribution plans in particular, financial education and member awareness has become increasingly crucial, in order to empower people to make sensible and informed choices regarding their pension provision. But, in answering the immediate questions posed by the economic downturn it is right that we reassure ourselves that our long-term approach is also appropriate.
Members of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) continue to work openly and together in sharing regulatory experiences, enabling us to compare and contrast approaches, and to exchange ideas. The central concerns of the Occupational Pensions Committee (OPC), the specialist pensions working group in CEIOPS, have always been to develop a common understanding of the IORP Directive and to facilitate supervisory cooperation and coordination. Events in recent times have shown us how no-one is immune to the effects of global events, and through the medium of the OPC, Member States can share knowledge and common practice to aid us all in understanding and tackling the challenges we face as regulators and supervisors of IORPs.
To this end, the Budapest protocol was agreed by the Member States in 2006 with an understanding that this would be reviewed in 2008 in light of experience gained by the various supervisors up to that time. From 1st April 2009, a draft revised text of the Budapest Protocol and its Appendices were made available for review by interested parties as part of a public consultation process. The protocol has as its central theme the framework for a cooperative and effective process for authorities in supervising cross-border schemes as well as a focus on ensuring an appropriate level of protection for members of cross-border schemes. The revised Protocol is planned to come into force by November of this year.
The OPC has also produced a number of reports which have aided supervisory transparency and convergence. These include a report on the implementation of the IORP Directive itself, which focused on key areas of the Directive and how Member States have incorporated its requirements into their national systems, as well as publications on outsourcing arrangements, and on the social and labour law requirements for each Member State. The process of convergence will be further served in November when the annual report on Market Developments is published on the CEIOPS website. This will mark the third year of comparison of the development in the internal market for cross-border arrangements, which the IORP Directive seeks to promote. Informal feedback suggests that this report is well read and received amongst market participants as a useful aid to understanding where the growth for cross-border IORPs is located, and for developments within each state.
Proposals for change
The economic downturn has also prompted extensive debate leading to proposals for regulatory reform. The de Larosiere Report crystallised this thinking into a series of initial recommendations and the European Commission has recently published a Communication on European Financial Supervision. This sets out proposals for a revised architecture for a European financial supervisory framework including reforming the Level 3 European committees of supervisors, which currently include CEIOPS, the Committee of European Banking Supervisors (CEBS) and the Committee of European Securities Regulators (CESR), to become European Supervisory Authorities (ESAs) taking a more advanced role. This aims at creating a more harmonised set of financial regulations, powers and sanctioning regimes.
There are also proposals for a new European Systemic Risk Council which would operate as an early 'risk warning' function to pick up systemic risk before it impacts our regulated communities. This body will call on the new European Authorities to provide it with the relevant data to enable it to fulfil its role.
CEIOPS and the OPC have been contributing to this debate, to help ensure there is effective representation of regulatory perspectives and experience in these changes, and we can look forward to forthcoming legislative proposals, to allow this renewed EU-wide supervisory framework to emerge.
In an evolving European pensions landscape it is essential to reinforce stability whilst embracing change. As regulators and supervisors of IORPs we are fully aware of the diversity of the nature and size of pension provision across member states and of the need to respect this diversity whilst promoting supervisory convergence. In the OPC we are working hard to ensure that proposals for change and the reactions to the current global financial instability are managed to ensure the best outcome for members and beneficiaries of occupational pensions in both the short and long term across Europe.