The resilience of UK pension schemes will be put to the test over coming months as Europe pursues its solvency and disclosure programme, though some have questioned who will bear the costs.
Earlier this month, the European Insurance and Occupational Pensions Authority launched stress-testing for the Institutions for Occupational Retirement Provision directive – a framework that enables pan-European pension schemes.
This is the latest instalment in a long-running debate on solvency, funding and the valuation of technical provisions for European schemes.
Last year, EIOPA put forward controversial proposals for a 'holistic balance sheet', a method that would disclose the extent to which pension obligations can be supported by a scheme's financial assets and security mechanisms under normal and stressed circumstances.
“It is vital that the impacts of a possible future solvency regime on the UK are clearly shown and that the advice EIOPA gives to the [European Commission] completely recognises the UK position”
The Pensions Regulator
Funding remains high on the European Insurance and Occupational Pensions Authority agenda and the stress tests will seek to assess how schemes withstand the impact of a series of adverse market scenarios and increased longevity.
EIOPA is targeting participation from European schemes covering more than 50 per cent of the total assets under management for defined benefit, and 50 per cent of total members or the total assets under management for defined contribution.
The Pensions Regulator has already contacted a sample of the largest DB and DC schemes in the UK to provide initial details of the two exercises, although participation in the process is on a voluntary basis.
A spokesperson from the Pensions Regulator said in a statement: “We understand that this is a very busy time for schemes and we will ensure that this exercise is run as simply and efficiently as possible.
“It is vital that the impacts of a possible future solvency regime on the UK are clearly shown and that the advice EIOPA gives to the [European Commission] completely recognises the UK position.”
The tests will be run in conjunction with a quantitative assessment of scheme solvency.
The deadline for disclosure is August 10 2015 and EIOPA hopes to deliver advice from the two exercises to the commission in March 2016.
Cost burden
However, some industry experts raised doubts about the plan.
Charles Cowling, director at consultancy JLT Employee Benefits, said: “I’m not sure how [EIOPA] will persuade somebody to do the work... why a company or pension scheme should pay for this to be done – there is no incentive at all.”
He anticipated minimal impact on UK schemes in the short term, regardless of the outcome of the stress-testing process, because EIOPA’s directive currently lacks backing from the European Commission.
“Until it’s got European backing and a formal brief, frankly it’s unlikely we’re going to get legislation,” he said.
However, Jeanette Holland, head of pensions at law firm Baker & McKenzie, said the industry needs to face up to the "elephant in the room".
She said greater levels of disclosure by UK schemes would lead to better representation of their interests in EIOPA’s decision-making.
“Is it better to give more detail and hang yourself out to dry than perhaps have a decision made in a vacuum?,” she said.
