On the march
Written by Marek Handzel
In his classic work The Art of War, the mysterious warrior-philosopher Sun Tzu says that all warfare is based on deception.
It’s an observation that the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA), in their fight with member states to decide the fate of many of Europe’s defined benefit (DB) pension plans, may have taken to heart.
Some would say that both bodies had to beat a hasty retreat over their plans to introduce a Solvency II type regime on occupational pension funds in the face of strong opposition from a confederation of UK, Dutch, Belgian, Irish and German lobbyists. But the withdrawal of such plans, confirmed in the Institutions for Occupational Retirement Provision (IORP) II Directive published in March, has taken on the look of having been a carefully calculated one.
Smokescreens and mirrors have been thrown up ever since last May when the Commission appeared to admit defeat over the matter, with internal market commissioner Michel Barnier citing the need for “more technical work” on any funding regime proposition. Cynical observers have taken the remark as a cover for the Commission and EIOPA’s real intention, which they say is to repackage their plans and wait for a more favourable economic climate in which to wheel them out again.
This way, with strong GDP figures humming a happy tune in the background, it may be easier to tackle the question of affordability that originally stopped the solvency requirement proposals from becoming a reality.
Nevertheless, says AllianceBernstein CIO for insurance in EMEA, Erik Vynckier, even if EIOPA were able to come up with a timely blueprint that negated the argument that Solvency II for pensions would seriously damage the companies running them, it would still have to produce a universal methodology on where to set funding safeguards.
“Many pension funds are open-ended institutions relying on irrevocable sponsor backing and an ongoing inflow of additional contributions from sponsors and members,” says Vynckier.
“(So) it has proven virtually impossible to devise a monetary metric for the strength of a sponsor’s commitment. “And besides, many individual countries have already made provisions to handle bankrupt sponsors, such as the levy-funded Pension Protection Fund in the UK.”
Despite such a daunting hurdle, EIOPA remains determined to push through with its recommendations.
“At the end of last year, EIOPA started work on improving the technical specifications (in areas like sponsor support, benefit reductions and discretionary decision-making processes) and specifying supervisory responses,” says its spokesperson Loek van Daalen.
“EIOPA’s eventual aim is to send advice to the Commission by the end of 2015, following a second quantitative impact study.”
So what makes EIOPA so confident that it can come back with more palatable suggestions?
According to JLT Employee Benefits director Charles Cowling, it comes down to the logical strength of EIOPA’s argument.
“When you look across the whole of Europe, there isn’t a black and white divide between pensions and insurance contracts; there’s a grey mess,” he says.
“The European Commission’s argument is that at the moment there’s regulatory arbitrage, because at the moment different regulatory environments get different rules applied to them.”
Added to that, he says, is the basic issue of pension funds being transparent in terms of their risks and investments.
“If you make a promise to someone, you deliver on that promise. Now why should that be different in a pension scheme compared to an insurance company?” says Cowling.
“Clearly, an insurance type promise would require a massive injection of capital that funds simply haven’t got. But that’s the main argument against [Solvency II], rather than any theoretical argument,” he adds.
What’s more, Cowling argues, the days of pension schemes being viewed as a ‘best endeavour’ employee benefit have long gone.
In the UK, for example, such a notion finished a decade ago, when legislation prevented a sponsor from walking away from a pension scheme unless it was fully funded.
“The introduction of the new regulations has slowly made schemes more guaranteed in the UK,” he says.
“So you could argue that the European legislation isn’t that draconian as some of the headlines suggest, because elements of it are already there.”
EIOPA’s argument has also been bolstered by Denmark’s decision to avoid waiting and to roll out its own Solvency II-type regime, turning theory into reality.
But translating EIOPA’s idea of stronger capital requirements into some of Europe’s more mature DB markets remains an impossible task in the eyes of many.
“What they brought forward is interesting as a concept,” says PensionsEurope economic adviser Thomas Montcourrier. “But we have shown - and continue to show - that it is not suitable for supervisory purposes. PensionsEurope is completely against this harmonisation of capital requirements as it has been presented to date,” he says.
“It will have several consequences on many aspects such as growth and financial stability, and with the current state of play, there really is no room for compromise.”
Over in the UK, Montcourrier’s colleagues at the National Association of Pensions Funds (NAPF) are equally bullish in their opposition.
NAPF EU and international policy lead James Walsh says that EIOPA will have to once again face the nigh on impossible task of trying to convince everyone that their plans make sense across Europe’s incredibly varied pensions landscape.
He points to the fact that the original proposals were defeated due to the creation of a coalition of pension bodies, business lobbyists and governments, proving their overwhelming unpopularity.
Walsh points out how the matter reached a head in April last year in the UK, when the country’s pensions regulator produced a report for the Pensions Minister Steve Webb, which estimated that Solvency II could have landed the UK with a £450 billion additional bill. Webb called them “reckless plans” and urged the Commission to abandon them.
“That is what the European Commission is going to face again if it decides to follow up on these plans,” says Walsh.
“The fundamental point is that it shows that insurance companies and DB pension schemes are different entities and there are good reasons for saying that they shouldn’t have to operate with the same sort of solvency levels.”
In the end, no matter what EIOPA comes up with, it is, as Van Daalen says, “the prerogative of the European Commission to make legislative proposals”. Which means that politics will play its part, with elections to the European Parliament coming up shortly.
“What will be crucial is what the attitude of Barnier’s successor to all this will be,” says Walsh.
EIOPA will be forceful in trying to encourage the new commissioner to take the Solvency II rules forward, so it may take someone who has a clear set of different priorities, to see the funding regime delayed again, or even completely shelved.
But pinning hopes on a commissioner who is averse to, or just not that concerned about, Solvency II is risky, says Pinsent Masons pensions lawyer Simon Tyler. He warns that although the argument appears to be a no-brainer for those in the opposition camp, it must ready itself to lobby just as hard as it did the first time around.
And Walsh says that there is no guarantee that the camp will be as well organised as it has been in the past.
“I expect the political and industry resistance to this to continue”, he says, “but there’s always the risk that changes of governments and ministers would mean that our opposition against this isn’t as strong as it was before.”
The last battle may have been won, but the war is by no means over.
Marek Handzel is a freelance journalist