Institutions for Retirement Provision: Adapting while staying on course
Providing a better prudential framework for institutions for retirement provision and preparing properly for the future: a delicate phase for stakeholders faced with deep-seated social change and the strict obligation to stay on course.
Institutions for retirement provision: Three objectives
- Manage existing liabilities and pay pension benefits in accordance with historically defined provisions for current pensioners and for those who will retire within the next five years.
- Take account of social change, in particular population ageing, people retiring later in life and their corollary: the diversification of the career paths of individuals, who may successively be an employee in the private sector, then an entrepreneur, before becoming a public service employee.
- Ensure that the changes introduced provide future generations with a decent replacement income, thus limiting the number of pensioners living in poverty.
Regulator: Two priorities
For the European regulator, the European Insurance and Occupational Pensions Authority (EIOPA), the aim is:
- to have an efficient information reporting system in order to better supervise the sector;
- to adapt the prudential framework by distinguishing it from Solvency II, in order to address the challenges facing the sector in all its diversity.
At a national level, in France, the first half of 2017 was marked by the ordinance establishing the FRPS – Fonds de Retraite Professionnelle Supplémentaire (Supplementary Occupational Pension Fund) – on 6 April and by a decree on supplementary pension funds for liberal professions on 9 May.
These two pieces of legislation have the common goal of providing a better prudential framework for these schemes given their objective: to contribute to the replacement income of future pensioners. Thus, the EUR 130 billion1 for supplementary occupational pensions can upon request fall outside the prudential framework of Solvency II, currently imposed by the French regulator for this scheme, and may instead benefit from a more suitable, less restrictive investment framework.
For supplementary pension funds for liberal professions, the aim is to clarify and harmonise the investment universe and the related monitoring arrangements for the reserves established within the framework of the contributory pensions system in order to contribute to the payment of future benefits.
We cannot predict the future, but we can prepare for it.
Point of divergence: a differentiated prudential approach
IORP II has not changed the prudential framework of IORP I and does not propose a coverage ratio threshold for pension liabilities. The European regulator has explicitly stated its wish to avoid a one-size-fits-all approach and has established a roadmap in which an in-depth understanding of the sector must precede the establishment of more precise prudential provisions.
One of the points criticised by the pension funds for liberal professions is the investment approach adopted for funds with a deficit. If the cost of benefits and administrative expenses exceed contributions for the last ten years, this would entail switching investments into vehicles that generate a stable and secure cash flow.
Without calling into question the need for prudence, the pension funds for liberal professions criticise this provision, since it imposes a framework that penalises the remediation plan that needs to be implemented by the fund concerned. It fails to take account of the specific characteristics of the fund in question and the substance of the remediation plan that might be proposed.
Point of convergence: improved reporting
The corollary of these regulatory changes is the need for pension institutions to adapt their reporting system and launch a wide-ranging project for the recovery and enrichment of third-party information, in particular from asset management companies so as to meet the requirements in terms of look-through approach for invested assets.
There is no doubt that the expertise acquired by providers of securities services at the time of the implementation of Solvency II may prove useful, but that will not be enough since some of the requested changes, in particular for pension institutions for liberal professions, require specific studies and developments. Here we refer in particular to the requirements related to derivatives and the monitoring of the costs of financial intermediaries by investment category.
It would be difficult to criticise our regulators for wanting to acquire monitoring tools as a prerequisite to better supervision.
For the next developments, a careful examination of the technical constraints and related costs would in all likelihood enhance the action taken.
EIOPA work programme for the period 2017 – 2019
- Playing an active role in the implementation of the IORP II Directive on Institutions for Occupational Retirement Provision, adopted on 12 January 2017:
Proposals for cross-border defined-benefit pension funds (2017 - Q4)
Proposals for standardised, improved information for members and beneficiaries in the context of IORP II (2018)
Implementation of the EIOPA vision for the quality and availability of core data for the development of a suitable regulatory framework for the sector in all its diversity (2019)
- Organisation of annual stress tests on an alternating basis (Insurance/Pension funds)
- Development of the regulatory framework applicable to pan-European personal pensions (PEPP).