On 14 April, the EU pensions regulator, EIOPA, announced that it is ending its work on a solvency-based funding regime for pension schemes.
This is great news for trustees, scheme sponsors and their members as the threat of a new pension funding system based on the insurance industry’s solvency II legislation has been one of the biggest regulatory threats to DB schemes for over a decade. If implemented as EIOPA originally intended, with a risk-free discount rate to calculate liabilities, the ‘Holistic Balance Sheet’ would have caused massive increases in deficit calculations and major funding headaches for defined benefit scheme sponsors. EIOPA has instead announced its conclusion that ‘a one-size-fits-all solvency regime would not be appropriate’ and ‘to refrain at this point in time’ from introducing harmonised funding or capital requirements for pension arrangements across Europe.
Whilst this is very welcome news from a funding perspective, the sting in the tail is that EIOPA still plan to develop their idea of an Holistic Balance Sheet into a ‘reporting’ regime, to run alongside existing funding systems. This will mean that defined benefit schemes will need to calculate the elements of the Holistic Balance Sheet and include them in their annual reporting. These additional elements would include the value to a scheme of:
- legally enforceable and non-legally enforceable sponsor support i.e. the value of the sponsor covenant;
- pension protection schemes;
- conditional benefits;
- discretionary benefits; and
- benefit reductions in the case of sponsor default.
From a UK reporting perspective, schemes are currently going through the adoption of the latest version of the pensions accounting Statement of Recommended Practice (SORP 2015). This latest SORP maintains the stewardship model of a net assets statement, a form of reporting that has served pension schemes well for many decades. Effectively trustees only report the value of assets under their stewardship and separately disclose information relating to actuarial liabilities alongside it.
Whilst scheme sponsors will welcome the ending of the solvency based funding proposals, the additional reporting and auditing costs of the EIOPA proposals to all but the smallest defined benefit schemes in the UK will be huge. It is not clear from the EIOPA announcements when such a regime will be adopted, only that we are now entering a ‘preparatory phase’ and need to await further announcements. In the meantime, possibly depending on the Brexit vote in June, a new battle will commence to try and avert this further reporting cost burden on the UK pension industry.
If you are interesting in reading the full opinion from EIOPA it can be found here.