The buzzword in Europe is Solvency II, initiated by the European Commission to streamline insurance supervision and technically implemented by Gabriel Bernardino’s European Insurance and Occupational Pensions Authority (EIOPA).
While Bernardino, a trained mathematician, is wary of overregulation, he is committed to stricter regulation for insurers. “In the face of tightening regulation for banks, risk is increasingly shifted to insurers. If these institutions are acting like banks, their non-insurance activities should be treated as if they were banks,” Bernardino told the audience at the European Finance Week in Frankfurt, Germany in late 2012.
One of EIOPA’s key concepts to make the economic value of occupational pension funds’ risks, assets and liabilities transparent is the holistic balance sheet. It should be seen as a prudential supervisory assessment tool rather than a usual balance sheet based on generally agreed accounting standards, according to EIOPA’S chairman.
If these institutions are acting like banks, they should be treated as if they were banks Gabriel Bernardino
What Bernardino considers a move to greater financial stability sounds like a threat to the UK government and the country’s pension funds. A day before Bernardino’s speech, British pensions minister Steve Webb made his objections to Solvency II clear in no uncertain terms to an audience at the same venue. The Commission’s “wrongheaded proposals” could have a “devastating impact” on the British and the European economy.
Not only that. “The danger is that it destroys the prospect of risk sharing which otherwise many good employers would be willing to accept.” In a press statement accompanying Webb’s speech he said “We are urging Brussels not to pursue these dangerous, reckless plans.”
ELEPHANT IN THE ROOM
Webb, who became a Liberal Democrat Member of Parliament in 1997, based his criticism on a report his department had commissioned from the UK Pensions Regulator. According to the
, Solvency II could create costs of up to £400 billion ($643 billion) to pension schemes in the UK alone, causing defined benefit schemes in particular to close or freeze their plans. “And while we discuss the methodology and fine points of this estimate, there is a huge elephant in the room: Why are we doing this at all?” Webb went on to say. “This would kill DB.” UK Impact Assessment
Yet, pension plans are also under pressure due to the government’s austerity measures. Cuts to pension tax reliefs announced in December will save the Treasury an estimated £1bn ($1.6 billion) a year by 2016 / 2017, but could harm the nest egg not only of the ultra-rich but also of doctors and head teachers, experts warn. “I know these tax measures will not be welcomed by all; ways to reduce the deficit never are. But we must show we’re all in this together,” George Osborne, Chancellor of the Exchequer, said in his autumn statement.
The pensions minister’s brush with the European Commission receives support from PensionsEurope, the former National Association of Pension Funds (NAPF). The Association’s chairwoman Joanne Segars said Webb was absolutely correct in his stance against the Commission’s proposal. “Brussels is proposing a damaging solution to a problem that does not exist. Businesses struggling to keep jobs and investment going would instead have to divert huge amounts of money into their pension fund, completely unnecessarily,” she told The Actuary.
Despite the regulatory sparring with European institutions, pension adequacy remains the order of the day for Webb, a gentle man equally “delighted to be continuing in my role as Minister of State for Pensions” as “pleased and proud to have been invited to present awards at 1st Abbotswood Scouts” in his electoral district just north of Bristol, according to his tweets last fall.
About Steve Webb
Steve Webb serves as the Minister for Pensions. Before being elected as a Member of Parliament in 1997, he was professor of Social Policy at Bath University. From 1986 to 1995, he worked as an economist at the Institute for Fiscal Studies. The Department for Work and Pensions is overseen by the secretary of state for Work and Pensions, Iain Duncan Smith.
Webb’s approach to stop the closure of more and more DB pension plans is defined ambition. This hybrid scheme sits between defined benefit and defined contribution and while the saver’s contributions are guaranteed, actual retirement income based on an annuity is not. Funding requirements could thus be more lenient. “This type of pension could sit within a less burdensome regulatory regime and give businesses the freedom to offer the type of provision that works best for their employees,” Webb told the National Association of Pension Funds in early 2012.
According to evidence presented to the UK parliament by Aon Hewitt in May 2012, defined ambition pensions, as modeled on Dutch collective DC schemes, are advantageous. Among the reasons is the fact that, because a sponsor’s contribution rate is fixed and investment risk is shared among savers, benefits are predictable (but not certain) close to retirement and investment decisions are made not by individuals, but investment professionals.
Yet, defined ambition is no panacea. The approach is not yet widely popular with employers, in fact, Webb himself expects patchwork uptake by firms and legislation would have to be amended to make a clear regulatory distinction between defined ambition and defined benefit. And the risk of increasing complexity in the future remains.