New solvency rules for pension funds will not be included in IORP Directive reforms, says EU Commissioner

Internal Market and Services Commissioner Michel Barnier said that the Commission would propose reforms to the Institutions for Occupational Retirement Provision (IORP) Directive this autumn, with the amendments aimed at improving the governance and transparency of occupational pension funds. However, he said that "further technical information" was required before new rules around the solvency of such funds would be introduced.

"At last some good news for defined benefit (DB) pension schemes," pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said. "Powerful lobbying, supported by the Pensions Minister, has paid off."

The European Commission had proposed that the revised IORP Directive should contain more stringent solvency requirements for pension providers. The new system should, it had said, be compatible with the solvency requirements due to come into force for insurers from 2014 under a regime known as Solvency II "to the extent necessary and possible".

The Commission had said that new solvency rules were necessary to ensure a "level playing field" between insurance companies, which sell pensions in various EU member states, as well as to protect the pension savings of cross-border workers.

However, the UK already has strict protections in place for occupational pensions, including a Pension Protection Fund (PPF) which will pay out to members of DB schemes in the event of an employer's insolvency. DB schemes promise a set level of pension once a member reaches retirement age, and although their use is on the decline due to high costs, they continue to account for a considerable amount of the private pension assets in the UK.

"Solvency II could have dealt those employers with DB pension schemes a serious blow," Tyler said. "Although additional governance and disclosure requirements for occupational pension schemes are still planned, trustees and employers can heave a sigh of relief that the major threat to DB schemes has been averted, at least for the time being.”

The European pensions regulator, the European Insurance and Occupational Pensions Authority (EIOPA), had previously conducted an initial study into the solvency of pension funds across the EU. It had suggested that a "holistic balance sheet" approach could be introduced to ensure that pension funds across Europe meet similar solvency requirements regardless of whatever national security mechanisms are in place. EIPOA is due to publish a final report this summer.

In a statement Barnier said: "This proposal will not cover the issue of solvency rules for pension funds, which will for the time being remain an open issue. In my view, the situation should be re-examined once we have more complete data. I emphasise that with regard to solvency rules, we must not lose sight of the need to guarantee in the longer term a level playing field between different providers of occupational pensions."

"Nevertheless, I already call on countries which have undercapitalised pension funds to take the necessary measures without delay, and I welcome the initiatives already taken in some Member States to achieve this," he added. "As I have often said, my priority is to protect future pensioners. We must face up to the weaknesses in some occupational pension funds. However, I have no desire to penalise national systems which work well. And I especially do not want, in the current fragile economic situation, to harm the ability of pension funds to play their role as long-term investors."