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ETUC response
EU Commission Consultation on the Harmonisation of Solvency Rules applicable to Institutions for Occupational Retirement Provision (IORPs) covered by Article 17 of the IORP Directive and IORPs operating on a cross-border Basis
Responses to questions
A. IORPs subject to Article 17 of the IORP Directive
This section focuses on IORPs that are subject to Article 17 of the IORP Directive. These IORPs underwrite liabilities to cover against biometric risks, or provide guarantees of a given investment performance or a given level of benefits. They are therefore required to have regulatory own funds, i.e. "additional assets above the technical provisions to serve as a buffer". For these regulatory own funds, Article 17(2) of the IORP Directive refers to the Solvency I regime in the recast Life Directive. As the recast Life Directive will cease to exist after the adoption of Solvency II, the main question for IORPs subject to Article 17 is whether and to what extent the Solvency I regime should be replaced by solvency rules similar or equivalent to the Solvency II rules.
This main question is dealt with by looking first, in general terms, at the objectives and principles of the solvency rules and then, more specifically, at the rules relating to regulatory own funds and funding.
(i) Objectives and Principles
1. Solvency rules for IORPs subject to Article 17 should aim at guaranteeing a high degree of security for future pensioners, at a reasonable cost for the
sponsoring undertakings, in the context of sustainable pension systems that are decided by the Member States.
Question Do you agree, or do you consider that the overall objective of solvency rules for these IORPs should be different?
For ETUC all pension institutions – not only IORPs subject to Article 17 – should provide for a high level of income security at reasonable costs. The primary objective is objective is the protection on pensioner and future pensioner.
2. Beneficiaries and sponsors seek to secure occupational pensions that maintain standards of living after retirement. Pension schemes, in particular those that provide life-long income such as annuities, are subject to risks related to future mortality rates, financial returns on assets, future inflation, future participation and contribution rates, which affect the overall solvency position of IORPs subject to Article 17. The CEIOPS survey shows that there are wide differences between Member States in their approach to these and other risks.
Question a) Do you believe that prevailing solvency rules for IORPs subject to Article 17 provide adequate protection relative to the objective of safeguarding pension beneficiaries’ claims at reasonable cost for the sponsoring undertakings?
For ETUC the regulatory own funds requirement of Article 17(2) can enable Member States to put in place appropriate safeguards for the protection of the claims of the beneficiaries of IORPs under Art. 17(1). But, ETUC notes that often IORPS employ a model in which the risks are shared between employer and employees. For these IORPs the regulatory own funds should be seen as additional requirements that Member States can place on top of technical provisions – further to Article 17(3) -, not as regulatory own funds required by Article 17(2).
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Nonetheless the existing rules of Solvency II are not adapted to the pension framework for the reason that investment in equity is not favored when the duration of the liability is long term.
Question b) Have there been shortcomings or flaws identified in the prevailing solvency rules for IORPs subject to Article 17? If yes, please specify. What could constitute the main challenges lying ahead?
ETUC is not aware of any shortcomings or flaws in the prudential regulation of IORPs falling within or categorised within Article 17(1),
As already said, risks in IORPs are often shared collectively between employers and employees. These IORPs appear to have been categorised in this way because the only reference in the Directive to regulatory own funds is in Article 17.
This is especially as Article 17(3) can be read as saying that Member States can require other IORPs to hold regulatory own funds without applying the provisions of Article 27 and 28 of the Life Assurance Directive as required by Article 17(2).
Question c) Which solvency rules could be viewed as proactively dealing with different risks and improving risk management techniques?
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ETUC considers that the short-term (one year) solvency regimes which is for the banking and insurance sector, are not appropriate for IORPs. The long time horizon of IORP liabilities , and the reasonable certainty with which their date of
maturity is known, mean that the regulations covering IORPs need to focus the long term. So the Solvency II rules must be adapted for IORPs.
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Question d) To what extent do compulsory versus voluntary membership in pension schemes have a different impact on the overall outcome of solvency rules and in which case(s) are problems likely to arise in the future?
ETUC believes that compulsory versus voluntary membership have no impact in the solvency position of the IORPs
Question e) To what extent do the solvency rules prevailing today in the different Member States need to differ for single-employer or multi-employer IORPs subject to Article 17?
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There is no reason for solvency rules to differ between single or multi-employer IORPs subject to this article.
3. The CEIOPS survey outlines four common overarching principles, as part of emerging best practices underpinning the supervisory framework which may be relevant to this consultation on IORPs subject to Article 17. First, a forward-looking risk-based approach to pension supervision, that weighs the potential risks faced by an IORP, as well as risk mitigants, and tailors the scope and intensity of supervision to this appraisal. Second, the principle of market-consistency in the valuation of an IORP’s assets and liabilities for supervisory purposes. Third, the principle of transparency, which implies that an IORP is open on how its financial position is determined and that reserves (or shortages), as well as prudence embedded in technical provisions and adjustment instruments, are made explicit to the supervisor. Fourth, the principle of proportionality, implying that supervisory requirements are
applied in a manner proportionate to the nature, complexity and scale of the IORP’s inherent risks.[1]
Question a) Do you agree with these principles and which principles do you consider particularly relevant or not relevant to underpin the supervisory framework for IORPs subject to Article 17?
ETUC thinks it is difficult to scale down this question to Art. 17 IORPs only.
Question b) Are there any other overarching principles that you consider relevant for IORPs subject to Article 17?
Another overarching principle ETUC feels relevant for Art. 17 IORPs is the proportionality principle and respecting diversity
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Question c) Do you see a case for a different supervisory approach for IORPs subject to Article 17 depending on their size or complexity?
There is a case for differences in supervisory approach dependent on size and complexity. Large, complex IORPs subject to Art.17 may be comfortable with using complex models to assess risk and take decisions on funding levels. Furthermore, they may be able to use such models to demonstrate that they need less funding than would be required by simple rules. Small IORPs subject to Article. 17 on the other hand are unlikely to have the capacity to undertake
sophisticated modelling; requiring them to do so could add disproportionately to their costs. The rules applying to them must therefore be kept simple.
Question d) To what extent do you consider that the supervisory frameworks existing today for IORPs subject to Article 17 already meet the principles emerging out of international best practice, as described in the CEIOPS survey?
The existing framework is not adapted to pension providers: it does not take into account the specific nature of the risk, and the rules differ too much between Member State
(ii) Regulatory own funds and funding rules
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4. In cases where the IORP itself, and not the sponsoring undertaking, underwrites the liability to cover against biometric risk, or guarantees a given investment performance or a given level of benefits, the IORP is required to hold additional assets in the form of regulatory own funds according to the rules currently prevailing for life assurance undertakings (Solvency I). As from 2012, it is expected that new solvency rules will apply to life insurance undertakings
(Solvency II). This would mean that from a solvency perspectivedifferent rules will apply to IORPs subject to Article 17 and life insurance undertakings offering similar products.
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Question a) Do you anticipate competitive distortions emanating from the application of different solvency regimes between insurance companies and
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IORPs subject to Article 17? Please specify.
The ultimate policy objective for all IORPs whether or not subject to Article 17,is to secure as far as practicable the cost-effective delivery of the pension promise in whatever form it takes.
ETUC also considers that in general IORPs, even those subject to Article. 17 or holding regulatory own funds, and insurance companies do not compete in the same market. Pension schemes provided by IORPs and pension products provided by insurers are different arrangements with different “product” features.
If the European Commission seeks like to pursue a “real” level playing field for all workplace pension providers we believe the first step should be to structure the private pension market and to identify the relevant market for workplace pension provision.
Question b) Do you have any evidence of such competitive distortions (as mentioned in the previous sub-question) existing already?
ETUC has no evidence of any competitive distortions.
Question c) What would be the likely impact of applying Solvency II (or similar solvency rules) to IORPs subject to Article 17?
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ETUC believe that IORPs are different from insurance contracts, so Solvency II
rules should not apply: they cannot be considered as insurance contract .
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Question d) What would be the impact on the future provision of defined benefit schemes and the risk of closing down existing schemes?
The accumulation of the additional financial buffers required by Solvency II would demand a massive rise in contribution rates and/or a reduction in retirement benefits. This would hurt the purchasing power of consumers and raise labour costs, eroding the competitive position of companies in those Member States. A lower allocation to equities by these IORPs would reduce the expected return on investments, which would necessitate a massive rise in contributions to maintain the same level of pension benefits.
So, Solvency II rules should not apply to defined plans guaranteed by employers
Question e) What would be costs and benefits of this? Please provide quantitative information, where available.
ETUC is unable to provide a detailed cost-benefit analysis
Question f) In case a Solvency II-type regime were to be applied to IORPs subject to Article 17, which elements would need to be adjusted to take account of the specificities of the institutional set-up in which that IORP operates (e.g. recovery plans, additional contributions, flexibility of benefits, etc.)?
ETUC feels that a Solvency II type regime is inappropriate for IORPs subject to Article 17.
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5. The IORP Directive requires IORPs subject to Article 17 to hold assets to fund their technical provisions at all times. In the event of underfunding, the IORP
is required to establish a recovery plan.
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Question In case of overfunding can the excess assets be returned to the sponsoring employer or are there restrictions to this (thereby reducing the upside potential for employers)? Does this partly depend on whether occupational pension schemes are closed or open to new members?
This question does not seem particularly relevant for IORPs that underwrite all liabilities themselves. In that case, the sponsor does not have a stake in the IORP and should not have a claim on excess assets. As already mentioned, most IORPs that are required to maintain risk buffers, and which may be subject to legislation based on Article 17(3) do not underwrite all liabilities themselves, but instead the risks are shared by employers and employees. In such cases there is a risk that over-funding upfront may become a trapped surplus in the IORP, especially where the IORP is closed to new members or accrual. This would be economically inefficient.