European pension funds should be subject to a new common framework for standardized risk assessment, but they will not be subjected to certain solvency rules or capital requirements, said the European Insurance and Occupational Pensions Authority.
In its “Opinion on a Common Framework for Risk Assessment and Transparency for Institutions for Occupational Retirement Provision,” published Thursday, the authority recommended to the European Parliament, European Council and the European Commission that they strengthen existing pension fund regulations.
EIOPA wants a common framework throughout the Europe, setting out that assets and liabilities on a pension fund’s balance sheet must be valued on a basis that’s consistent in all markets. This framework must also report all available security and benefit adjustment mechanisms for the pension fund, such as support from the sponsoring employer, pension protection schemes and benefit reductions. A standardized risk assessment would be applied to this common framework to calculate the impact of common, pre-defined stress scenarios on the pension funds.
In an additional paper published by EIOPA on Thursday, detailing the impact of these recommendations on pension funds, the authority said across all European defined benefit funds, an overall annual cost to the pension funds would be up to €300 million ($341.6 million) to complete the common framework’s balance sheet and standardized risk assessment. U.K. funds “could incur the greatest annual estimated costs in aggregate” of €210 million due to the number of funds in the country.
However, EIOPA said its impact assessment concluded that the benefits of such a regime “are expected to exceed the costs of the common framework.”
The authority also said it does not advise on solvency or funding requirements “at this time.”
“This opinion presents a major step forward toward realistic, risk-sensitive information on the financial situation of pension funds,” said Gabriel Bernardino, chairman of EIOPA, in a statement accompanying the framework paper. “EIOPA’s recommendations to modernize the European regulation of pension funds aim at supporting the occupational pensions sector to meet its current and future challenges.”
The Pensions and Lifetime Savings Association welcomed the plans to introduce a new solvency regime to pension funds. “EIOPA’s decision to end its work on solvency marks an important development in the long-running debate about a solvency-based funding regime for pensions,” said Joanne Segars, CEO at the PLSA, in a news release. “It is good news for pension schemes in the U.K. and Europe and a result our member pension schemes have campaigned tirelessly to reach.”
However, Ms. Segars added that the new standardized reporting regime “would cause unnecessary confusion without delivering any benefit to scheme members.”