UK pensions industry urged to influence EIOPA solvency standards impact assessment

The Pensions Regulator urged stakeholders to provide feedback to the European Insurance and Occupational Pensions Authority (EIOPA) in order to "ensure that the UK approach to pensions regulation is understood and recognised by the EU" before the EIOPA makes its valuation recommendations to the European Commission. The European watchdog's work will be used to inform revisions to the Institutions for Occupational Retirement Provision (IORP) Directive, due next summer.

EIOPA has proposed a "holistic balance sheet" approach to ensure that pension funds across Europe meet similar solvency requirements regardless of whatever national security mechanisms are in place. The consultation primarily considers the value that should be assigned to the various components of this holistic balance sheet. These components include the scheme's assets in relation to its liabilities and the employer's covenant, or ability to support the scheme, as well as the existence of national guarantees.

The European Commission has requested that EIOPA carry out a quantitative impact study (QIS) to enable it to gauge the effect of the proposals. The QIS is due to take place in the autumn.

In its call for advice issued to EIOPA last April, the European Commission said that it was looking to introduce risk-based supervision for pension providers as part of its reform of IORP. The new system should, it said, be compatible with the solvency requirements due to come into force for insurers from 2014 under a regime known as Solvency II "to the extent necessary and possible".

The potential introduction of Solvency II-style standards for pension funds has been met with outcry from the pensions industry and Government, with research by industry body the National Association of Pension Funds (NAPF) suggesting that such a requirement could cost UK businesses an extra £300 billion. In certain EU member states pensions are sold by insurance companies, which is why the Commission has considered extending the solvency rules for that industry to pensions. However the UK already has strict protections in place for occupational pensions, including a Pension Protection Fund (PPF) which will pay out to scheme members in the event of an employer's insolvency.

"We will continue to work with EIOPA, the UK Government and stakeholder groups to ensure that the UK approach to pensions regulation is understood and recognised by the EU," said Bill Galvin, chief executive with the regulator. "If the Commission chooses to adopt EIOPA's advice on the use of a 'holistic balance sheet', we will seek to ensure that it is implemented in a flexible way that is consistent with our scheme-specific approach. I can also reassure pension trustees that the regulator plans to carry out the autumn QIS using our existing data and analysis so there will be no additional burden upon schemes."

Pensions law expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, echoed the regulator's comments.

"EIOPA's proposals for a holistic balance sheet have raised concerns of Solvency II-type requirements being imposed on UK pension schemes – this consultation provides schemes with an important opportunity to inform the EU of the problems that this approach could create for UK defined benefit pensions," she said. "In these circumstances, the UK pension industry will only have itself to blame if it fails to engage in this consultation and the forthcoming EU Pensions Directive then ignores the special circumstances of UK schemes."

NAPF chief executive Joanne Segars said that the body was "very disappointed" that the European Commission was still considering a holistic balance sheet approach.

"Faced with extra funding demands, companies will either divert money away from business investment and job creation to pay for these pensions, or will simply decide to stop offering them," she said. "We will continue to make the case for the new EU Pensions Directive to focus on areas where it could make a positive difference, rather than undermining support for good pensions."