Europe’s oversight authority for pensions has stepped back from a controversial solvency regime that could have cost billions in additional deficits.
The European Insurance and Occupational Pensions Authority (EIOPA) yesterday announced it would conduct regular scenario stress tests for pension portfolios to ensure they are aware of the risks they are running.
“The case for a common [solvency] framework at European level has not been adequately made.”However, the authority has shelved its proposal to impose the holistic balance sheet as a funding regime on all pension funds in the European Union (EU).
The European Commission dropped the holistic balance sheet idea two years ago, but EIOPA has kept discussions open, arguing that a continent-wide model would help trustees, regulators, and other stakeholders to access more information about the financial stability of pensions. EIOPA has met with fierce resistance from most European countries, with the UK and Germany among the most vocal.
Stefan Nellshen, chief financial officer for German pharmaceutical company Bayer’s retirement funds, told CIO last year that the proposed system “will probably mean less security for employees, fewer high-quality occupational pensions, and lower future economic growth. I am pretty sure that this is not what we should strive for.”
James Walsh, policy lead for EU and international at the Pensions and Lifetime Savings Association in the UK, said the revised proposal was “much less damaging” for pension funds.
“With the additional costs, you would have to ask if it would have been significantly better than the current robust funding and risk management framework,” Walsh said of the holistic balance sheet concept.
According to EIOPA’s own estimates, the solvency regime would have added as much as £350 billion to Europe’s aggregate defined benefit pension deficit. Other estimates have been even higher.
Rowan Harris, actuary at Barnett Waddingham, said the revised proposal was the “least worst” option, but added that small pension funds were still likely to see significant cost implications for running two funding calculations to comply with national and international rules.
Despite the welcomed revision of EIOPA’s plans, “the case for a common framework… at European level has not been adequately made,” Harris said.
“We believe there are more pressing priorities for EIOPA to pursue such as extending workplace pension saving to the 60% of EU citizens who have no access to it at present,” added Pensions and Lifetime Savings Association Chief Executive Joanne Segars.
There is some good news for opponents of EIOPA’s plan: Thanks to Europe’s lengthy process for introducing new legislation, the authority’s ideas need to be considered by the European Commission, European Parliament, and national-level politicians. Walsh of the Pensions and Lifetime Savings Association said his group was “pretty confident” there was little appetite from the continent’s lawmakers to push through more pensions rules.
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