Advice given to the European Commission by the European Insurance and Occupational Pensions Authority (EIOPA) today marks another milestone for the development of Europe-wide solvency standards for pension schemes, according to Towers Watson.
Dave Roberts, a senior consultant at Towers Watson, said: “Now that the European Commission has fulfilled the requirement to get advice from EIOPA, it can press on with developing proposals that are likely to have major cost implications for UK employers.”
However, the consultancy welcomes EIOPA’s statement that the extent to which its preferred way forward can be “considered a viable alternative to the existing [pensions] Directive will very much depend on the outcomes of a quantitative impact assessment, which in EIOPA’s view is essential for any legislative proposal”.
Dave Roberts said: “EIOPA has taken a firm line, going as far as to say that its advice on new funding rules is ‘conditional’ on the outcome of an impact assessment. So although the Commission has the green light to proceed, there is a potential roadblock ahead. The impact assessment is expected to be delivered in the third quarter of this year. If the Commission is to take this seriously, its desired timescale for delivering a draft Directive – by the end of 2012 – should be reviewed.”
Subject to the outcome of this impact assessment, EIOPA has recommended that the Commission develop rules around the concept of a “holistic balance sheet”.
Dave Roberts said: “This means that a pension scheme would be given a much higher funding target than under current UK legislation and would have to meet this through a combination of its financial assets, its ability to call on further support from the employer, and its recourse to organisations like the Pension Protection Fund.
“EIOPA says deficits should be cleared as soon as possible and generally within 15 years. One option also involves employers hitting funding targets similar to those they have today but potentially within much shorter deadlines; this begs the question of what happens where doing so would put the employer’s business at risk. The Commission did not ask EIOPA whether it should introduce new Europe-wide funding rules for defined benefit pensions, only what these should look like. If you ask a harmonising question, you will get a harmonising answer.”
In carrying out its impact assessment, EIOPA is “working with those member states that expressed an interest”. Dave Roberts said: “As UK schemes are responsible for a majority of the benefits that would be covered by the new rules, they will be a major focus of this work. The UK Government does not have enough votes to block whatever the Commission eventually proposes on its own, so confirming that the reforms would have major implications in the UK will not necessarily be decisive. However, multinational companies based elsewhere in the EU will be mindful of the impact on their UK subsidiaries.”
The advice published today differs little from that on which EIOPA consulted in October 2011. In particular, it still includes several different options for how liabilities could be calculated under the “holistic balance sheet” approach and for determining the additional reserves that schemes might have to hold.
Dave Roberts said: “Perhaps this isn’t surprising given the extremely short timescale between the consultation on more than 500 pages of draft advice closing in January and the deadline for EIOPA delivering its final verdict to the Commission. However, because EIOPA has kept multiple solvency options on the table, there is a risk that the Commission will plough ahead as it pleases. The Commission mustn’t be allowed to build an unstoppable momentum.”