A point often made by sceptics is that Solvency II does not fit in the low interest world of today. Is there truth in the claim the stress factors are too high in comparison to the yields?
The stress factors are a reflection of the situation of the economic cycle and the stress factors are not constant. Constant is only the 99.5% confidence level. The risk factors are not set in stone. There will be a review of the risk factors. The risk charges will be recalibrated as time goes by. Most of the risk factors take into account the evolution in the markets.
Let’s be frank: Solvency II is not perfect. There are no perfect regulatory systems. Regulatory systems are based on reference points. You have to understand that the system is built upon a European average. So it cannot reflect exactly the risks of a typical [British] insurer.
But the “beauty” of Solvency II is that we have besides the standard formula the possibility to use partial models or internal models. These models bring capital calculations closer to the risk and I am sure these models will grow in the future.
What should pension funds expect from Solvency II?
Right now, nothing. But we believe that occupational pension funds also need to have a much more risk based regulation. At the moment a reality check needs to be brought to the occupational pension funds area. For the future it is important to understand the steps that are needed. We came to three main conclusions. First, that the requirements and principles that we have in Solvency II on the governance side should also be applied to occupational pension funds. The principles, especially the requirements about risk management, are very much relevant for occupational pension funds, too. But of course in a proportional way. The second conclusion is about transparency. Solvency II improves information not only for supervisors but also for externals. We recommended to the Commission for example that in the case of contribution schemes a key information document should be given to (future) members of the plan, which would outline costs, charges, commissions and so on. Third conclusion: pension funds should also have an economic valuation of assets and liabilities.
But of course you have to realise the differences to insurance companies. The role of the sponsor company or guarantees has to be taken into account.
Is there a conflict of interest by caring for both pension funds and their members?
On the contrary. The best way to deal with these two perspectives is to take them together. The best consumer protection is to look for a sound and robust pension fund or insurance company. On top of that there are other elements which are fundamental too like a fair treatment, good information, good service.
But a consumer wants to have a high pension and this is not healthy for a pension fund.
Of course you want to have the highest pension possible. But this cannot be achieved with increasing risk from the plan or the insurer. Because that can be a risk to the pension when you are old. The element of stability on the system overall and the element of consumer protection need to be considered together. And look at the crisis in the banking sector: who is paying at the end of the day when you have instability? All of us. So you cannot say that financial stability and consumer protection need to be seen in isolation.
How does EIOPA take the low interest environment into account?
It is in our responsibility to think in advance of what could come. The best way to deal with risks is to try to measure them and to be preventive. We want at least to see what are the different ways of dealing with this. We have performed a stress test on major insurance players in Europe with a focus on low yield scenarios. This test is public. We are now entering into the second stage of this analysis where we are talking to the different supervisors in Europe and looking at what kind of activities have been performed. Then we will concentrate on those cases where the analysis has to go deeper. There are various ways to deal with this. What is important is that companies recognise this situation and change their products and investments. But again the same lesson: it is better to start now to deal with that.
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