EIOPA says go ahead with Solvency II for schemes

The European Insurance & Occupational Pensions Authority (EIOPA) is publishing long-awaited advice (seen by PW) to the European Commission – the executive body of the European Union – on introducing Solvency II (SII) requirements for workplace schemes.

The Institutions for Occupational Retirement Provision (IORP) legislation would force schemes and employers to adhere to a variety of rules likely to increase liabilities, including more sponsor payment towards full funding for plans with higher allocations to equities, infrastructure and other higher-risk assets.

A new discount rate for schemes also remains part of the proposals, which would further reward lower-risk investments and force employers to make up for lost returns.

The document states: "The introduction of a risk-free interest rate may result in higher allocations to risk-free bonds. This would lower expected returns and decrease expected benefits or increase contribution rates...

"EIOPA is of the opinion that the provisions for [insurance] funds and classifications into tiers as stated in... the Solvency II directive can also be made applicable to IORPs."

But the advice contains acknowledgement many respondents to last year's consultation on the proposed legislation had legitimate concerns about the economic impacts of forcing sponsors to pay more cash towards schemes, and maintained the commission should be prepared to reconsider the rules after it and EIOPA conduct separate impact assessments.

The news is a blow to UK plc following an indication from the European Commission it is considering dropping these more contentious 'quantitative' elements of the legislation, but has been waiting for EIOPA's views on the subject.

Confederation of British Industry pensions policy chief Jim Bligh said: “We are significantly concerned by EIOPA’s support for a Solvency II-style tiering of assets. This would be disastrous for investment allocation and seriously destabilise financial markets with a  flight away from equity.

"The broader economic impact would be substantial as well with firms struggling to raise capital from markets and infrastructure funding being compromised.

“Among the few positives of this advice is a recognition from EIOPA that the Commission’s proposals carry economic risks that would seriously damage long-term growth and job creation in the EU."