EU solvency plans for pension schemes and the ‘Holistic Balance Sheet’

EU solvency plans for pension schemes and the ‘Holistic Balance Sheet’

The PLSA has consistently resisted EU plans for a new funding regime for pension schemes, based on the insurance industry’s Solvency II Directive.

Concerted opposition from an alliance of five Governments (UK, Neth, Ger, Ire and Belg) forced the European Commission to remove pension solvency from the new IORP Directive when it was launched in 2013.

Workplace pension schemes are quite different in character from insurers; in general they do not compete with each other and do not present the same systemic risks to the wider economy, so there is no case for the same regulatory responses.

EIOPA’s own Quantitative Impact Study demonstrated that the original Holistic Balance Sheet proposal would (on the benchmark scenario) have increased the deficits of UK defined benefit schemes by €176 billion, even after allowance had been made for the additional support provided by sponsors and the Pension Protection Fund. This would have overstated the extent of DB deficits in the UK, principally through the use of an unnecessarily exacting discount rate regime and the inclusion of a solvency capital requirement. This would be highly damaging to the sustainability of DB schemes and would very likely force the closure of the schemes still open to new members and the complete closure of many of those cent still open to further accrual by existing members.

Despite these compelling arguments, the European Insurance and Occupational Pensions Authority (EIOPA) has attempted to maintain pressure for a solvency-based regime, advancing the idea of an EU-wide ‘Holistic Balance Sheet’ that would be used as a reporting tool. The PLSA is concerned that, if introduced, this could become the basis of a harmonised EU funding regime at some point in the future. 

EIOPA Quantitative Impact Assessment, April 2016

EIOPA report on pension stress tests, January 2016