Editorial: Trustees had better wrap up warm: a chilly wind is blowing from Europe. A short sunny spell in Brussels last week was quickly followed by a cold front from Frankfurt, where the European Insurance and Occupational Pensions Authority is based.
When the European Union’s ECON Committee voted on a revised Institutions for Occupational Retirement Provision directive, it looked like things could become “simpler and more flexible” than was first proposed by the European Commission, the Pensions and Lifetime Savings Association said.
Even though the European Commission has so far shown no appetite to follow up on the long debate that took place around pension scheme solvency a few years back, this might not always be the case
But in the same week, the Eiopa stress tests results showed that while pension schemes would surprisingly not fare too badly if life expectancy suddenly improved, a scenario with falling asset prices would – as nobody will be surprised to hear – make funding levels drop like a stone in water.
It is an open secret that Eiopa is hoping to introduce solvency requirements for pension funds, and is pushing for them through exercises like these stress tests, as well as the quantitative assessment, which it calls “an important input to Eiopa’s work on solvency for IORPs”. In March, the authority will give advice to the European Commission on solvency rules for pension schemes.
Even though the European Commission has so far shown no appetite to follow up on the long debate that took place around pension scheme solvency a few years back, this might not always be the case – as some have rightly pointed out, the Commission will have different members in the future, and they might feel differently about these issues (see our article on Eiopa).
Whatever a solvency regime for pension schemes would look like close up, UK pension scheme deficits would likely start to become very unhealthy – the current funding level is 84.9 per cent according to the PPF 7800 index – and companies might be asked to pick up a bill of over several hundred billion pounds. This would not only mean certain death for any remaining defined benefit schemes, but could also have uncomfortable impacts on the British economy.
But Europe is a slow-moving machine, and perhaps the weather will change in the meantime.
Sandra Wolf is editor at Pensions Expert. You can follow her on Twitter @SandraCWK and the team @pensions_expert.
