The European Insurance and Occupational Pensions Authority has submitted its advice to the European Commission on reforms of pension laws that would involve Solvency II rules being applied to workplace schemes.
Making its response yesterday to the Commission's call for advice on the review of the Institutions for Occupational Retirement Provision, or IORP, Directive, the association called for the strengthening of 'fit and proper' critieria.
There should also be a 'proportionate...implementation of robust internal and external controls and sound risk management frameworks', it said, which should be 'adjusted for the nature, size and complexity of IORPs'.
Among the other proposals made by EIOPA are for valuation and capital requirements to involve the concept of a 'holistic balance sheet' to develop a Europe-wide risk-based supervisory regime for IORPs.
This, the association said, would 'acknowledge the existing diversity of occupational pension systems in the EU member states, while capturing all these systems into a single balance sheet'.
EIOPA also called for the introduction of a 'Key Information Document' for defined contribution schemes which would allow members to have confidence in the scheme regardless of where it is located in the European Union.
The full EIOPA submission can be read here.
Paul Sweeting, European head of strategy at JP Morgan Asset Management said the advice did little to allay concerns about the outlook for defined benefit pensions in Europe. In particular, he said the focus on individual scheme solvency as the only way of securing members' benefits failed to acknowledge the role that compensation schemes such as the Pension Protection Fund could play.
The recommendations on valuing assets against liabilities come across as an attempt to force schemes into a framework designed for insurance companies, he said.
'Most concerning', he said, were the valuation principles proposed, which would involve both assets and liabilities being taken at market value. If the risk free rate proposed was used, then the difference between financial assets and best estimate liabilities would be over £700bn in the UK alone, according to JP Morgan figures.
This difference could be offset by a commitment to future contributions, but Mr Sweeting noted that it still implied that full buy-out funding is the ultimate aim.
He added: 'This paper gives useful insights into the planned changes to European pensions legislation. However, if the recommendations are adopted - and it is still an "if" rather than a "when" - the impact on defined benefit pensions schemes, not to mention the broader economy, will be profound.'
Alex Waite, a partner at Lane Clark and Peacock, said the aim of a holistic balance sheet was a 'noble and ambitious objective', but was 'clearly not a cost effective mechanism for dealing with the vast number of widely differing occupational pension schemes across Europe'.
Mr Waite echoed concerns raised by unions, business leaders and pension funds earlier this week that the plans would involve the complete closure of defined benefit schemes in favour of defined contribution schemes.
He added: 'With yet more retrospective legislation being piled n employers, many will close down their occupational pension schemes, and pass the risks to large insurance companies. A number of employers have already taken advantage of the current favourable insurance pricing, before excess demand pushes up the price of buying insurance.'
Dave Roberts, a senior consultant at Towers Watson, welcomed EIOPA's emphasise on its advice being conditional on the outcome of a quantitative impact assessment of the proposals. He noted, however, that this could lead to a slip in the timetable for implementing a draft revised IORP Directive.
'Although the Commission has the green light to proceed, there is a potential roadblock ahead. The impact assessment is expected to be delivered in the third quarter of this year. If the Commission is to take this seriously, it's desired timescale for delivering a draft Directive - by the end of 2012 - should be reviewed,' he said.
Commenting on the plans for a holistic balance sheet, Mr Roberts said this would involve schemes being given a much higher target than currently expected under UK legislation. They would have to meet this goal through a combination of their financial assets, calling on more employer support and recourse to bodies like the PPF.
'EIOPA says deficits should be cleared as soon as possible and generally within 15 years. One option also involves employers hitting funding targets similar to those they have today but potentially within much shorter deadlines; this begs the question of what happens where doing so would put the employer's business at risk,' he said.
'The Commission did not ask EIOPA whether it should introduce new Europe-wide funding rules for defined benefit pensions, only what these should look like. If you ask a harmonising question, you will get a harmonising answer.'
For Sackers and Partners, partner Zoe Lynch said the company was 'deeply concerned' about Solvency II standards being applied to UK pension schemes. The 'main problem', she said, was EIOPA being given a narrow remit by the Commission, in particular being asked how funding requirements could be further harmonised, rather than whether they should be.
Despite this, she still criticised EIOPA's advice. 'The proposals take insufficient account of the robust regulatory environment in the UK policed by the Pensions Regulator nor the fact that occupational DB provision is a not-for-profit arena and not a competitor of the insurance industry.'