EUROPE – European pension funds should not be so quick to claim victory over the issue of including capital requirements in a revised IORP Directive, as similar rules could be introduced "indirectly" through the Own Risk Solvency Assessment (ORSA) process, Towers Watson has warned.
Speaking with IPE, Dave Roberts and Mark Dowsey, both senior consultant at Towers Watson in the UK, welcomed the decision taken by the Commission last week to postpone the implementation of pillar one of the revised IORP Directive.
However, they warned pension funds against the "significant and costly" introduction of pillars two and three, which focus on governance and disclosure, respectively.
According to them, the risk lies in the ORSA tool, which will be introduced as part of the Solvency II framework for insurers.
Under Solvency II, insurance companies will be required to perform their own risk and solvency assessment, which will then become a component of their risk management system.
Both expect pension funds to have to enter into an ORSA process in future, as the European Insurance and Occupational Pensions Authority (EIOPA) has already suggested in the past.
"The question, however, remains what will appear in the final outcome of the ORSA," Roberts said.
"Even though EIOPA said in the past that only a 'diluted' version of ORSA might be needed for pension funds, now that pillar one of the revised IORP Directive has been dropped – at least temporarily – the authority and Brussels could adopt a much less steep approach."
Roberts went on to say that, taking into account the announcement on pillar one made last week by Michel Barnier, the commissioner responsible for internal market and services, two options are looming.
In the first option, Brussels could stick with the original version of a "light" ORSA, which would not include any capital rules.
In the second, however, the European Commission could strengthen the ORSA and introduce some solvency capital rules.
"We might end up doing pretty much what we should have done within pillar one anyway," he said.
"And, depending on the final outcome of the ORSA, we might see pension funds having to comply with capital requirements."
Additionally, Dowsey warned against the potential "light touch" EIOPA could adopt even if Brussels decided not to introduce capital requirements.
According to him, the ORSA requirements could impact pension funds across Europe at a different level.
Dutch pension schemes, for instance, would certainly be more impacted than their UK counterparts, since funds in the Netherlands are more or less regulated as insurance companies.
"So there is no reason to expect that the ORSA will be more or less onerous for Dutch pension funds than for Dutch insurance companies," he said.
Roberts cited "a lot of uncertainty" surrounding the ORSA process at this stage.
"Don't get me wrong – this is very helpful for insurers to understand risks embodied in their business," he said.
"But it is still a very significant change to the way they have been operating to date, and a very significant increase in their time and effort to put into this new risk policy and how they report the risk to the board.
"It is just very difficult at the moment to fully assess what the challenges are going to be."