Gover­nance, sus­tain­abil­ity and trans­parency key ar­eas of focus

Kathimerini English - - Sponsored Section - BY EV­GE­NIA TZORTZI

Health­care is among The cre­ation of a Europe-wide in­sur­ance mar­ket that will be able to pro­vide cus­tomers with a guar­an­tee of sta­bil­ity and trans­parency is the Euro­pean In­sur­ance and Oc­cu­pa­tional Pen­sions Author­ity’s (EIOPA) key ob­jec­tive.

This is con­firmed by Justin Wray, deputy head of EIOPA’s Pol­icy Depart­ment and head of the In­sur­ance Pol­icy Unit, who notes that “a pen­sion sys­tem which has a role for all three pil­lars – state, oc­cu­pa­tional and per­sonal – is likely to be more ro­bust than one which has a role for only one pil­lar.” How would you de­scribe the in­sur­ance and oc­cu­pa­tional pen­sions sec­tor in Europe? Which are the main chal­lenges and trends?

The best word to de­scribe pen­sions in Europe is “di­verse.” Each coun­try has a dif­fer­ent bal­ance be­tween what is pro­vided by the state and what is pro­vided pri­vately; and within pri­vate pen­sions what is pro­vided via em­ploy­ers and what is pro­vided di­rectly by pen­sion providers.

Pen­sions con­tinue to face sig­nif­i­cant de­mo­graphic and fi­nan­cial chal­lenges. These arise from pop­u­la­tion ag­ing: a smaller pro­por­tion of work­ing-age cit­i­zens sup­port­ing a larger pro­por­tion of el­derly cit­i­zens. In fi­nan­cial terms, the big­gest chal­lenge is the low in­ter­est rate en­vi­ron­ment af­fect­ing both the as­set and li­a­bil­ity side of pen­sion funds.

Even more fun­da­men­tally, cit­i­zens need to trust their pen­sion provider, whether this is the state or a pri­vate fund. That re­quires good gover­nance and good pro­vi­sion of in­for­ma­tion to pen­sion scheme mem­bers. We re­cently learned of the Pan-Euro­pean Per­sonal Pen­sion Prod­uct (PEPP), a new ini­tia­tive pro­moted by EIOPA. What are its main char­ac­ter­is­tics and why does it make sense?

The PEPP is a pro­posal for a prod­uct reg­u­la­tion put for­ward by the Euro­pean Com­mis­sion on which EIOPA worked ex­ten­sively in re­cent years. EIOPA sub­mit­ted its ad­vice on the de­vel­op­ment of an EU sin­gle mar­ket for per­sonal pen­sion prod­ucts (PPP) to the Com­mis­sion in 2016. The cre­ation of a trust­wor­thy Euro­pean per­sonal pen­sion prod­uct will ben­e­fit those mo­bile Euro­pean cit­i­zens who cur­rently may not have ac­cess to high-qual­ity pri­vate pen­sion prod­ucts. It will en­cour­age per­sonal pen­sion sav­ings for in­di­vid­u­als and en­able im­por­tant long-term in­vest­ments. The prod­uct will be rel­a­tively sim­ple and trans­par­ent, with a de­fault op­tion and a lim­ited num­ber of in­vest­ment choices. The draft reg­u­la­tion pro­poses that EIOPA would au­tho­rize PEPP prod­ucts and serve as an in­for­ma­tion hub by cen­tral­iz­ing in­for­ma­tion on its web­site. EIOPA will also play a key role in co­or­di­nat­ing the su­per­vi­sion in a con­sis­tent way through­out Europe. What are EIOPA’s aims and am­bi­tions within the Euro­pean in­sur­ance and pen­sions arena in 2018?

On the in­sur­ance side, now that the leg­isla­tive part of Sol­vency II is com­pleted, we are putting ever more em­pha­sis on su­per­vi­sory convergence. In the area of pen­sions, the de­vel­op­ment of the PEPP and the im­ple­men­ta­tion of key parts of the new In­sti­tu­tions for Oc­cu­pa­tional Re­tire­ment Pro­vi­sion Di­rec­tive (IORP II), such as on risk man­age­ment and in­for­ma­tion to mem­bers give us a full agenda. Fur­ther­more, sus­tain­able fi­nance will be an in­creas­ing theme, which – through the con­sid­er­a­tion of en­vi­ron­men­tal, so­cial and gover­nance (ESG) fac­tors – is a nat­u­ral driver of pen­sion funds’ cor­po­rate fi­nan­cial plan­ning and gover­nance mod­els. EIOPA ar­gues that there are three fun­da­men­tals for im­prov­ing pen­sions pro­vi­sion in Europe: strong gover­nance, en­hanced sus­tain­abil­ity and full trans­parency. What is EIOPA cur­rently do­ing to achieve these goals?

We are cur­rently work­ing on three main ar­eas to im­prove the pen­sion pro­vi­sion. First of all, IORP II for the first time sets out at Euro­pean level some spe­cific re­quire­ments for pen­sion scheme gover­nance. We will be de­vel­op­ing ap­proaches in ar­eas such as risk man­age­ment, build­ing on pre­vi­ous work such as EIOPA’s com­mon method­ol­ogy. Se­condly, this year’s pen­sions stress test will pro­vide an as­sess­ment of how sus­tain­able pen­sions are in case of ad­verse eco­nomic devel­op­ments. We are also work­ing on im­prov­ing in­for­ma­tion to pen­sion scheme mem­bers in or­der to aid trans­parency.

Our work on de­vel­op­ing the pan-Euro­pean per­sonal pen­sion mar­ket will like­wise em­pha­size gover­nance, sus­tain­abil­ity and trans­parency. Un­der what cir­cum­stances could fu­ture deficits of state pen­sion sys­tems af­fect pri­vate pen­sion schemes? In your opin­ion, what role will pri­vate in­sur­ance play in the fu­ture of pen­sions in Europe?

There is a say­ing in English, “Do not put all your eggs in one bas­ket,” which ap­plies to pen­sion sys­tems. All those who pro­vide pen­sions, whether it is the state, em­ploy­ers or in­sur­ers, face dif­fer­ent risks to their sus­tain­abil­ity. A pen­sion sys­tem which has a role for all three pil­lars – state, oc­cu­pa­tional and per­sonal – is likely to be more ro­bust than one which has a role for only one pil­lar. The ap­pli­ca­tion of Sol­vency II, the new su­per­vi­sory frame­work for in­sur­ance and rein­sur­ance com­pa­nies, sig­naled a shift in the as­sess­ment of sol­vency, mov­ing to a more risk-based ap­proach. What are the main find­ings of the Sol­vency II frame­work?

Im­ple­men­ta­tion of Sol­vency II has been rel­a­tively smooth and is be­ing suc­cess­fully im­ple­mented dur­ing the times of a chal­leng­ing macro-eco­nomic en­vi­ron­ment. Spe­cific tran­si­tional mea­sures, and mea­sures to mit­i­gate the im­pact of volatil­ity on bal­ance sheets, are play­ing a sig­nif­i­cant role. Over­all, the in­dus­try is ad­e­quately cap­i­tal­ized. How do the ul­tra-low – and in many cases neg­a­tive – in­ter­est rates af­fect the in­vest­ment poli­cies of the in­sur­ance sec­tor? How do the Euro­pean Cen­tral Bank’s poli­cies af­fect the sec­tor over­all?

What is strik­ing is in fact how rel­a­tively lit­tle in­vest­ment al­lo­ca­tion by in­sur­ers has been af­fected by the low in­ter­est rate en­vi­ron­ment. In­vest­ment al­lo­ca­tion across the main as­set classes of bonds, equities and other in­vest­ments was pretty steady be­tween 2011 and 2016. Within that, there is a trend to­wards more illiq­uid in­vest­ments such as non-listed equity and non-mort­gage loans. Are in­sur­ance-re­lated in­vest­ment prod­ucts where the pol­i­cy­holder bears the risk a cred­i­ble sav­ings tool in the cur­rent en­vi­ron­ment?

We can see a trend across Europe in pen­sions mov­ing away from de­fined ben- efit pen­sions un­der­pinned by guar­an­tees to de­fined con­tri­bu­tion pen­sions where the pol­i­cy­holder bears the risk. While there is noth­ing in­her­ently sub­op­ti­mal about pol­i­cy­hold­ers bear­ing more of the risk, it does make fea­tures such as pro­vi­sion of in­for­ma­tion more im­por­tant. In­sur­ance com­pa­nies are sub­ject to Sol­vency II, while pen­sions funds are not. EIOPA pro­poses a Holis­tic Bal­ance Sheet (HBS) ap­proach for oc­cu­pa­tional pen­sion funds. Could you de­scribe its ba­sic frame­work?

Given their long-term na­ture, mem­bers of oc­cu­pa­tional pen­sion funds need to trust their providers. Trust will be en­hanced if there is a com­mon and trans­par­ent frame­work for as­sess­ing risks. EIOPA’s com­mon method­ol­ogy pro­vides a stan­dard­ized ba­sis for this. It means that su­per­vi­sors of oc­cu­pa­tional pen­sions through­out the Euro­pean Union have agreed a com­mon means of mea­sur­ing fi­nan­cial and other risks. Oc­cu­pa­tional funds have re­cently un­der­gone stress tests. Could you give us some in­sights on as­sump­tions and re­sults?

The 2017 stress test is cur­rently un­der way. The pre­vi­ous stress test in 2015 showed that a pro­longed pe­riod of lower in­ter­est rates will pose sig­nif­i­cant fu­ture chal­lenges to the re­silience of de­fined ben­e­fit pen­sion funds. It also showed that ad­verse mar­ket devel­op­ments were a greater risk than in­creases in longevity. How could oc­cu­pa­tional funds be suc­cess­fully in­cor­po­rated into a coun­try’s pen­sion sys­tem?

The di­ver­sity in pen­sions in Europe is the friend of any coun­try want­ing to in­cor­po­rate oc­cu­pa­tional pen­sions into their sys­tem. There are mul­ti­ple paths that a coun­try start­ing out can fol­low. In par­tic­u­lar, this can be an op­por­tu­nity to learn from the dif­fer­ent ex­pe­ri­ences some coun­tries with oc­cu­pa­tional sys­tems have had. EIOPA and its mem­bers closely fol­low and an­a­lyze the dif­fer­ent sys­tems through­out Europe.

the top items on the pri­or­i­ties list of the over­whelm­ing ma­jor­ity of cit­i­zens and this sur­vey found it to be the top rea­son why re­spon­dents would elect to take out pri­vate in­sur­ance in the near fu­ture. Specif­i­cally, 44 per­cent of the MRB sur­vey’s 1,000 re­spon­dents said that it is likely or pos­si­ble that they will take out some form of pri­vate health in­sur­ance at some point in the near fu­ture, while only slightly less con­ceded to the pos­si­bil­ity of life in­sur­ance (40 per­cent) and a pen­sion plan (39 per­cent). The pub­lic health sys­tem is viewed as very un­sat­is­fac­tory or slightly sat­is­fac­tory by 62 per­cent of re­spon­dents, while 66 per­cent ex­pressed their dis­ap­point­ment and said they be­lieve that ser­vices will be re­duced in the fu­ture. Only 26 per­cent of re­spon­dents said that pub­lic health ser­vices will im­prove in the fu­ture. Seven in 10 re­spon­dents said they would like to en­sure ac­cess to bet­ter health­care by tak­ing out some form of pri­vate in­sur­ance. It is worth not­ing that the an­swers given by the re­spon­dents are not based on their abil­ity to pay for a pri­vate in­sur­ance pro­gram, as the sur­vey only as­sesses be­liefs and in­ten­tions. As such, re­al­iza­tion of their ex­pec­ta­tions would de­pend on an im­prove­ment in their per­sonal fi­nances and in the coun­try’s econ­omy. From the 1,000 re­spon­dents sur­veyed by the Greek re­search firm MRB, 91 per­cent said that they be­lieve their pen­sion will not be suf­fi­cient to cover the needs that will arise once they re­tire.

‘Cit­i­zens need to trust their pen­sion provider, whether this is the state or a pri­vate fund,’ says Justin Wray.

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