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Pension fund boards - remember your liability insurance covers!
Comment on new Norwegian pension fund regulations. Article in "Finansavisen", November 22nd 2018
Norway has almost 100 pension funds, which at the end of 2017 managed asset of approx. 360 BNOK. They secure the pension benefits of hundreds of thousands of Norwegian employees and pensioners. The pension fund boards are ultimately responsible for the operations and management of the funds. There will be considerable changes in the regulation and taxation of pension funds from 2019, which will in turn increase the complexity of the board activities and responsibilities. Board members should definitely pay attention to the changes. At the same time, the pension fund sponsor, i.e. the employer securing pension schemes through the pension fund, should very carefully evaluate how the fund can best comply with the new requirements.
One major change is the introduction of the EU second occupational pensions directive, IORP2. A direct consequence of the new directive is that the pension funds will face requirements as regards administration, risk management and reporting that are very close to those that apply to insurance companies. The practical difference is that while insurance companies have large departments that deal with these matters, the typical pension fund has only a few staff members in total – and frequently on a part time basis only. Complying with the new regulations will be a major challenge, for the fund and for the board. There are many examples from other countries of sponsors concluding that the requirements for pension fund regulatory compliance in this new world are so extensive, and so far away from the ordinary business of the sponsor, that they quite simply close down the funds.
At the same time new and uniquely Norwegian capital and solvency requirements for pension funds are beign introduced, further complicating matters. Norwegian pension funds are made subject to a capital and solvency regime equivalent to that applying to insurance companies. A lot has been said about the negative effects of applying the Solvency II requirements to pension funds, but an obvious consequence is that the funds will meet considerably higher and more volatile capital requirements than previously. According to calculations made by the Financial Supervisory Authority of Norway, the pension funds in total fall short of the new capital requirements. To make the adaption easier, transition rules may apply, and with the effect that only a minor part of the new requirements come into force for the first few years. The decision to apply transitional rules is a responsibility of the pension fund boards, but it is difficult to see that this is a decision the boards can make without a full and explicit support from the sponsor. New regulations make it clear that if transition rules are to be applied, there must be plan as to how the capital coverage of the fund is to be increased over time. As the funds require investment returns well above current interest rate levels to meet benefit promises, it is hard to see investment results as a source for increased capital. That really only leaves increased contributions from the sponsor, either through higher premiums or as direct contributions, as capital sources. Both these alternatives require acceptance and commitment from the sponsor, and are not decisions that the pension fund board alone can make. Indeed, this is just as much a decision for the board of the sponsor. The sponsor, in turn, would then also how to evaluate how such a capital commitment should be made in legal terms, and how it should be accounted for.
In this new world, pension funds become small insurance companies in regulatory terms, with the same requirements as insurance companies when it comes to capacity and competence for management and boards. As all of this is new, it is far from obvious what the final consequences will be.
But at least one conclusion is obvious; the complexity of pension funds increases, and it is not a good idea to accept a directorship with a pension fund without a very good directors’ liability insurance cover!
Links:
https://www.regjeringen.no/no/dokumenter/prop.-1-ls-20182019/id2613834/
Pension fund boards - remember your liability insurance covers!
Comment on new Norwegian pension fund regulations. Article in "Finansavisen", November 22nd 2018
Norway has almost 100 pension funds, which at the end of 2017 managed asset of approx. 360 BNOK. They secure the pension benefits of hundreds of thousands of Norwegian employees and pensioners. The pension fund boards are ultimately responsible for the operations and management of the funds. There will be considerable changes in the regulation and taxation of pension funds from 2019, which will in turn increase the complexity of the board activities and responsibilities. Board members should definitely pay attention to the changes. At the same time, the pension fund sponsor, i.e. the employer securing pension schemes through the pension fund, should very carefully evaluate how the fund can best comply with the new requirements.
One major change is the introduction of the EU second occupational pensions directive, IORP2. A direct consequence of the new directive is that the pension funds will face requirements as regards administration, risk management and reporting that are very close to those that apply to insurance companies. The practical difference is that while insurance companies have large departments that deal with these matters, the typical pension fund has only a few staff members in total – and frequently on a part time basis only. Complying with the new regulations will be a major challenge, for the fund and for the board. There are many examples from other countries of sponsors concluding that the requirements for pension fund regulatory compliance in this new world are so extensive, and so far away from the ordinary business of the sponsor, that they quite simply close down the funds.
At the same time new and uniquely Norwegian capital and solvency requirements for pension funds are beign introduced, further complicating matters. Norwegian pension funds are made subject to a capital and solvency regime equivalent to that applying to insurance companies. A lot has been said about the negative effects of applying the Solvency II requirements to pension funds, but an obvious consequence is that the funds will meet considerably higher and more volatile capital requirements than previously. According to calculations made by the Financial Supervisory Authority of Norway, the pension funds in total fall short of the new capital requirements. To make the adaption easier, transition rules may apply, and with the effect that only a minor part of the new requirements come into force for the first few years. The decision to apply transitional rules is a responsibility of the pension fund boards, but it is difficult to see that this is a decision the boards can make without a full and explicit support from the sponsor. New regulations make it clear that if transition rules are to be applied, there must be plan as to how the capital coverage of the fund is to be increased over time. As the funds require investment returns well above current interest rate levels to meet benefit promises, it is hard to see investment results as a source for increased capital. That really only leaves increased contributions from the sponsor, either through higher premiums or as direct contributions, as capital sources. Both these alternatives require acceptance and commitment from the sponsor, and are not decisions that the pension fund board alone can make. Indeed, this is just as much a decision for the board of the sponsor. The sponsor, in turn, would then also how to evaluate how such a capital commitment should be made in legal terms, and how it should be accounted for.
In this new world, pension funds become small insurance companies in regulatory terms, with the same requirements as insurance companies when it comes to capacity and competence for management and boards. As all of this is new, it is far from obvious what the final consequences will be.
But at least one conclusion is obvious; the complexity of pension funds increases, and it is not a good idea to accept a directorship with a pension fund without a very good directors’ liability insurance cover!
Links:
https://www.regjeringen.no/no/dokumenter/prop.-1-ls-20182019/id2613834/