Nick Mann meets Gabriel Bernardino, the man at the centre of the wholesale overhaul of Europes pensions and insurance regulation and supervision
Building up a new European financial regulatory authority would be a challenging task at the best of times. Doing so when Europe has been hit by its worst financial crisis in decades is tougher still, but that's the task that has faced Gabriel Bernardino since he was elected as the first chair of the European Insurance and Occupational Pensions Authority in January 2011.
Add in the wholesale overhaul of major European legislation underpinning both the pensions and insurance sectors and it's clear that, even with his 20 years of regulatory experience, the Portuguese-born Bernardino has his hands full.
At the top of his to-do lists are undoubtedly those two major legislative changes. New rules governing Europe's insurance industry, Solvency II, were originally expected to be implemented by January 2014, but the labyrinthine European political process has put paid to that, and concerns have grown over exactly when the new system will be put in place. Meanwhile, the pensions sector faces a revision of the Institutions for Occupational Retirement Provision Directive that has also raised hackles. Schemes, governments and business leaders question its potential impact on deficits, investment and, ultimately, growth.
Faced with those challenges, and the resulting concerns, it would be understandable if Bernardino battened down the hatches in EIOPA's Frankfurt headquarters and simply pushed out a series of consultation papers, edicts and reports. Instead, he speaks to The Actuary at the end of a lengthy grilling from key players in London's financial services industry in the offices of Standard Life, high up on the 34th floor of St Mary's Axe, better known as the Gherkin.
Getting out there and speaking to the people who will be affected by EIOPA's decisions is vital, Bernardino says. "I really want to understand the specificities of different members - what the problems are at a business and political level - and that's why I'm always trying to travel around and meet people, because I think that's fundamental," he explains. "I think only by understanding them can we provide better solutions for Europe."
Finding a solution to the question of how to improve regulation of Europe's insurance industry is not a new issue, but it is one that has been brought into focus by the financial crisis. The proposed Solvency II rules are an answer to "concrete issues", Bernardino explains, as the current "really risky situation" has shown products and business models being challenged by the economic reality that the European Union is now facing. "The regime we have with Solvency I is definitely not risk-sensitive, so we need to have much more risk sensitivity and capital requirements. That's a fundamental principle and you don't need to be an actuary to understand that... if you have more risk, you should have more capital."
Simple as those ideals might be, the process of making them a reality has been anything but. The European Commission's original aim of implementing the Solvency II rules by January 2014 was stymied by delays in the enabling legislation Omnibus II. A series of postponements to a key European Parliament vote on the directive were followed in October 2012 by Bernardino writing to the European Commissioner responsible for the legislation, Michel Barnier, warning him of concerns among national supervisory bodies and calling for a "clear and credible" timetable for the legislation. Taking such a strong stance in public could seem brave - even foolhardy - for a regulatory body, but Bernardino says one of the "fundamental aspects" of building a supervisory authority is to have "sufficient independence to say difficult things".
"The political process is the political process, but I'm not a political party and my responsibilities are clearly defined," he explains. "I think it is my responsibility to indicate to the political institutions that there are a number of elements that we need to confront." He's insistent, however, that the letter hasn't created any friction with the commission. "EIOPA is an independent supervisory authority, so there's no problem - not on my side and not, I'm sure, on the side of commissioner Barnier."
With the European Parliament vote now postponed until June, Bernardino acknowledges that, under a "credible timetable", it will be impossible to get full implementation of Solvency II before January 2016. "If you look at what needs to be made - standards, guidelines, all the processes, agreement on Omnibus II first of all - I think it will take until then to get started," he says. But he's under no illusions about the need to send out a "positive message" in the meantime - addressing the concerns of insurers who have already sunk large amounts of money into preparing for the new regulatory regime.
To that end, last November saw Bernardino unveil plans for the "interim" implementation of aspects of Solvency II relating to governance, risk management, the actuarial function and transparency in a bid to keep the momentum behind the whole project. "We believe 2014 and 2015 can be used as an opportunity to enter into the system in a better way," Bernardino asserts. "What we're exploring, together with all our members - all the supervisors around Europe - is how we can make possible a continuum towards the implementation of Solvency II, gaining experience from our side and also from the side of companies." With countries already making moves to prepare their regulatory systems for Solvency II, Bernardino sees it as a win-win situation. "If everybody is doing this, let's do it together, let's do it in a consistent way," he says. "What we don't want is that when we then start to really implement Solvency II, we face a larger inconsistency than we've got today. That is unacceptable."
Solvency II will be keeping Bernardino's in-tray full for a good few years to come, but it will be competing for space with the imminent revision of the legislation governing Europe's workplace pensions, the Institutions for Occupational Retirement Provision (IORP) Directive. With the aim of introducing a risk-based regulatory and supervisory process for pensions, the goals of the revision are not a million miles from those of Solvency II. Indeed, the past year has seen the public debate around the IORP revision dominated by concerns that it will simply transpose the capital requirement rules being introduced for the insurance industry over to the pensions sector. In November, the UK's Pensions Regulator said the plans could increase UK pension deficits by as much as £400bn, something pensions minister Steve Webb warned could have a "devastating" impact on the ability to invest in jobs and growth.
Bernardino smiles wryly when asked whether he's been surprised by the reaction to the plans. "I've been a regulator for more than 20 years, there are no surprises," he says. "Let's be frank, this is a very sensitive area and we totally understand that any kind of decision or changes in this area can have consequences." He acknowledges that there are a "lot of numbers" being used by people, but adds that "we all know that pension liabilities are so sensitive to changes in options and parameters that you can easily have figures like zero to £400bn, like the recent report published here in the UK by The Pensions Regulator. Nobody mentioned that it could be zero, but it's in the report".
Bernardino also stresses that there are many stages to go until the revised directive becomes a reality, noting that the quantitative impact study held before Christmas to assess key aspects of the potential changes is "not the end of the story".
He also says that, when it comes to offering advice to the Commission on the capital requirements that should be placed on schemes, "I've got no intention of proposing something that would mean 100% financing of all your liabilities and your capital requirements within the holistic balance sheet - that doesn't make sense. I'd prefer to have a situation where you make calculations in a more realistic way and then you have more flexibility on the supervisory side on how to deal with it."
Despite his conciliatory tone, Bernardino is in no doubt about the necessity for change. "We have a serious situation, and it's not because of Solvency II or IORP II or whatever. It's the economic reality. Many of these pension promises from pension schemes that were made 10 or 20 years ago were made in a completely different environment. We have a responsibility to confront this reality, because if we don't do it, or the later we do it, the more problematic it will be."
Bernardino's drive and commitment to addressing these issues is obvious. He knows it's a "big challenge", but describes it as a "privilege" to be involved in "building European supervision".
"It gives you a further level of difficulty but also a further level of motivation, and that's something that EIOPA is clearly recognised for," he enthuses.
"To be a responsible, independent authority, but one with a vision and ambition for the future - that's fantastic, because we all wake up in the morning with joy to go to work and feeling we're doing something positive. It's the best thing you can have in your life, to enjoy what you're doing and feeling that what you're doing is really making added value for all of us as a society and as human beings. That's something that no salary in this world can pay."
Gabriel Bernardino was born in Lisbon, Portugal, and received his bachelor's and master's degrees in mathematics, statistics and optimisation from the Universidade Nova de Lisboa.
His extensive international experience in insurance and pensions administration and public policy includes a spell chairing an EU Council working group responsible for negotiating the Solvency II proposal.
He has chaired the European Insurance and Occupational Pensions Authority since it was established in 2011 and is responsible for the body's strategic direction.