Keep an eye on the IORP

If you are a pension scheme or an insurer, you probably expect that UK regulation for these industries will track that of the EU once the UK (probably) leaves the bloc in March. Any financial services professional knows the UK not only influenced the direction of EU financial regulation in the past very strongly, but also wants a regulatory regime comparable to it in the future to facilitate cross-border finance and investment.

But here’s a way that The Lens has picked up on where regulation of pension schemes could change for the worse in Europe and therefore in the UK if we closely track laws from Brussels. It is to do with solvency regulation and links to a rivalry that exists between insurers and pension schemes.

Solvency II has placed significant and sometimes complex requirements on insurers in the EU to hold certain assets on their balance sheet for stability. It has arguably skewed insurance investment by, in the main, forcing insurers to hold safe but low yielding securities, like developed government bonds.

Banks have had a similar experience under iterations of Basel rules; but so far pension schemes have gotten away with anything quite so limiting on their investment strategies and part of the reason was lobbying by the UK’s Pensions & Lifetime Savings Association (PLSA) around the IORP II Directive.

Schemes will – hopefully – be familiar with IORP II. It transforms (not just revises) pension scheme governance and communications rules and it comes into effect now, albeit James Walsh, the EU and international policy lead at PLSA, has said pension funds do not need to worry about it. This large and significant slab of regulation is initially only the concern of governments who must implement it into national laws.

But the point is, although IORP II initially mirrored Solvency II with certain Solvency II-style requirements, the pensions industry in the UK managed to negotiate away these requirements, much to the chagrin of some insurers in the EU who see pension institutions as competitors and solvency rules as a competitive disadvantage. This is what Walsh told a CAMRADATA DC seminar recently and which you can read about in Funds Europe’s upcoming FE DC report.

So, The Lens urges you to keep an eye on the third IORP, should there be one. IORP III is where any future solvency laws will likely appear and the UK may feel obliged to follow them. In the meantime, read about some of the latest thinking in the world of insurance investment in previous blogs, here and here.