Published: September 14, 2008
The battle over whether European pension funds should become subject to new capital adequacy rules proposed for European insurers may be moving towards a conclusion.
The European Commission last week issued a consultative document to “ensure all parties concerned have a chance to voice their opinion” on the issue. Responses are due by November 28.
The UK’s National Association of Pension Funds is pleased the Commission has taken the “sensible” step of having an open consultation, rather than asking for advice from specialists, in the shape of the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops).
However, Pervenche Berès, a leading member of the European parliament, takes a different view. A supporter of tighter rules on pension fund capital adequacy, the French chairwoman of the European parliament’s Economic and Monetary Affairs Committee has described as a “discomforting signal” the decision by Charlie McCreevy, the EU commissioner for the internal market, to withdraw a “call for advice” from Ceiops. She concedes, though, that the immediate clamping on of strict rules is not “reality”.
“The state of some of the pension funds is so critical that if you tighten up rules [to control capital adequacy] then some of them would just not survive,” she says.
The NAPF has warned that the capital adequacy rules proposed under the Solvency II directive for insurance companies could force an unaffordable increase in funding levels for defined benefit pension schemes. They would
have to rise by 57 per cent in the UK, 62 per cent in Ireland and 39 per cent in the Netherlands. That would probably lead to more closures, says the NAPF.
Ms Berès takes the view that “it would be dangerous not to keep the door open for a future advance to tighter control”. She wants to keep the issue in discussion, suggesting a need to keep a “foot in the door”.
She sees logic in applying to pensions the Solvency II capital adequacy rules for the insurance sector that are now going through the Brussels legislative mill.
“What is needed is commitment to make sure that what you apply to insurance you apply [eventually] to pension funds,” she says. Both need reserves to cover their liabilities, and the fact that pension liabilities are further in the future is irrelevant. The money should still be there, says Ms Berès, to ensure there is no repeat of the Equitable Life debacle.
At the same time, she agrees there has to be some kind of smoothing process over time, to take account of divergent practices from one EU member state to another.
Ms Berès makes it clear that the Solvency II/pension fund debate is not so much of a political party matter in Brussels, but rather reflects a wide variation in pension norms across Europe.
Perhaps with Equitable Life and Northern Rock in mind, the socialist MEP points a sharp finger at the UK, where “there is a willingness to keep this subject completely out of the scope of discussion”. This contrasts, she says, with the Netherlands, “which is open for talks”.
Running parallel with the whole Solvency II/pensions issue is a proposal from the International Accounting Standards Board to upgrade its IAS 19 pension accounting rules. Its discussion paper is open for responses until September 26.
Jenny Lee, project manager for post-employment benefits at the IASB, says that under the current version of the rules, companies may be able to recognise a pension asset on the balance sheet, even when the plan is running a funding deficit, and vice versa. This is because companies do not have to recognise gains and losses on pension plan assets and liabilities when they occur.
IASB board member Philippe Danjou, who like Ms Berès is from France, where most occupational pensions happen to be run through life insurance and hence will come under Solvency II rules anyway, says some pension liabilities are as much as four times the market capitalisation of the company sponsoring them and the ratio of pension cost to income can also be very high.
“Unless an investor is an expert, he cannot compare accounts of one company with that of another. This is because of the many accounting options that companies can use, even within the framework of IFRS,” says Mr Danjou.
Likewise, Ms Berès notes that long- term investors in European Union economies do not know whether a solid looking balance sheet really is sound, or merely reflects mis-bookings of pension assets. This alone should cause alarm bells to ring.
As to comment on the move to upgrade IAS 19, Ms Berès is cautious. She points out it is not for her, nor for the European parliament, to contribute to the IASB’s move at present. That would have to follow recommendations from the IASB