Consultation on European Solvency Standards for pensions: Sackers’ Comments
The Green Paper “Towards adequate, sustainable and safe European pension systems” was published by the European Commission on 7 July 2010. The paper, in particualr, asks what an equivalent solvency regime for pension funds should look like (Question 10 of the Green Paper). In our view, there should be no imposition of an equivalent solvency regime.
In November 2009, the EU Parliament and Council adopted the “Solvency II” Directive which set out new solvency rules for insurance companies. Prior to this, and after much uncertainty as to whether the requirements of the Directive would also apply to occupational pension funds, the EU Commission stated that the Directive would not apply to pension funds covered by the IORP or Pensions Directive (Directive 2003/41/EEC). We believe it is unnecessary to re-open this debate for the reasons we set out below.
In this response:
- Protections for UK DB Schemes
- Setting minimum standards across the EU
- EU regulation of funded pension schemes
- Disclosure: Minimum information requirements
In the UK, there are significant existing protections for members of DB pension funds.
The statutory funding objective
Pension funds established in the UK are required to meet the statutory funding objective set out in Part 3 of the Pensions Act 2004 (which implements the funding requirements of Article 16 of the IORP Directive). This requires pension funds to achieve full funding in relation to their technical provisions. Although this objective is met on a scheme specific basis (generally by agreement of the pension fund trustees and the sponsoring employer), the UK Pensions Regulator has certain powers to impose funding requirements on schemes, for example, where the trustees and employer are unable to reach agreement.
Calculation of technical provisions: assumptions
Rather than using “best estimate” assumptions, the UK Pensions Regulator recommends that trustees “choose individual assumptions with a level of prudence consistent with the overall confidence they want to have that the resulting technical provisions will prove adequate to pay benefits as they fall due”. In choosing these assumptions, trustees are also required to take account of the strength of the sponsoring employer’s covenant (which helps them to judge how cautious an approach to take).
There is an obligation on employers leaving a group or winding-up a pension fund to meet the liabilities attributable to the departing employer, or the pension fund’s liabilities as a whole (on wind-up), at the cost of buying out members’ benefits with an insurance company (under the Pensions Act 1995, section 75).
Powers of the Pensions Regulator
The UK Pensions Regulator also has powers to ensure that pension liabilities are not avoided or unsupported, by means of:
- contribution notices (requiring payment to be made into a pension fund);
- financial support directions (requiring financial support to be put in place for a pension fund); and
- restoration orders (restoring the pension fund to the position it would have been in had a transaction at an undervalue not occurred).
The Pension Protection Fund
In the event of a company’s insolvency, the PPF (a statutory fund) will provide compensation to members of eligible DB pension funds. For the majority of people below their pension fund’s normal pension age the PPF will generally pay 90% level of compensation.
Generally, this means 90% of the pension an individual had accrued (including revaluation) immediately before the date when the pension fund is assessed prior to entry into the PPF (subject to a review of the rules of the pension fund by the PPF) and revaluation in line with the increase in the relevant index between the assessment date and the commencement of compensation payments. (Revaluation is subject to a cap of 5% in respect of service between April 1997 and April 2009 and 2.5% in respect of service thereafter). The caps apply in deferment.
This compensation is subject to an overall annual cap, which, as at April 2010, equates to £29,748.68 at age 65 after the 90% has been applied. The cap will be adjusted according to the age at which compensation comes into payment.
For individuals who have reached their scheme’s normal pension age or, irrespective of age, are either already in receipt of survivors’ pension or a pension on the grounds of ill-health, the PPF will generally pay 100% level of compensation.
We are aware that pension provision around the EU (and protections for funded pension arrangements) varies widely. However, the suggestion put forward in the Green Paper that a solvency regime should also apply to pension funds does not take account of the existing funding requirements and protections for members which exist already in the UK (and in some other Member States). In our view, requiring sponsoring employers of pension funds to hold reserves akin to those required of insurance companies, will only serve to hasten the well documented decline of DB pension provision across the EU, as a result of the increased costs and regulatory burdens.
Conditions for cross-border activity
The Green Paper (Q5) asks how the IORP Directive should be amended to improve the conditions for cross-border activity.
In our experience, the reality is that the cross-border provisions of the IORP Directive have stifled, rather than encouraged, cross-border activity.
Ahead of implementation (via the Pensions Act 2004) of the cross-border provisions of the IORP Directive, many pension funds which had previously operated cross-border (as had been the case for many Anglo-Irish pension funds which were “dual approved” by the UK and Irish revenues) sought to divest themselves of their non-UK members in order to avoid the more stringent funding requirements which apply in the UK to schemes which operate cross-border.
Article 16(3) of the IORP Directive provides that: “In the event of cross-border activity […], the technical provisions shall at all times be fully funded in respect of the total range of pension schemes operated.” (Emphasis added.)
Our understanding is that interpretations of this provision around the EU have been diverse. Generally, however, domestic pension funds are able to make use of much greater flexibility to ensure that any shortfall in funding is eliminated over a short, but reasonable, period of time taking into account all the factors relevant to each particular pension fund. It would be extremely helpful if the requirement in 16(3) were extended to allow cross-border arrangements greater flexibility to manage scheme funding.
It would also be helpful to have:
- clarification as to what constitutes cross-border activity; and
- clear information as to which laws in each Member State fall within the scope of “social and labour laws”. We note that links to certain information in this regard is accessible via the EIOPA website. However, much of this is provided by means of statutory references, which can be difficult for pension fund providers, administrators, members and others to assimilate.
For members who do not transfer their benefits between Member States, it would be useful for the Commission to retain a central register of the national tracing services which exist in each Member State.
The Green Paper (Q8) asks whether current EU legislation needs reviewing to ensure a consistent regulation and supervision of funded pension schemes and products.
In our view, pension funds in the EU are already subject to significant regulation. Any further regulation would be likely to deter good quality second pillar provision, particularly if attempts are made to impose a higher funding standard than applies currently. Furthermore, there is little evidence that pension funds pose a material risk to financial stability.
The UK already has in place significant obligations in relation to the disclosure of information in relation to occupational and personal pension funds (primarily via the Occupational Pension Schemes (Disclosure of Information) Regulations 1996). These regulations have been revised following a Government consultation to accommodate, among other things, the provision of information electronically. The new rules will come into force on 1 December 2010.
Minimum information disclosure requirements across the EU should lead to the provision of clear information about existing and available pension provision, with the result of encouraging take-up of supplementary pensions. However, given the variety of different types of pension funds across the EU, it may be difficult to devise standards that cover all types of arrangement. It would, however, be worth assessing the merits of developing a minimum disclosure standard.