consultation on Supervisory Statement the use of risk mitigation techniques by insurance and reinsurance undertakings

Improved supervision of pension costs and charges, and of defined contribution risk management: EIOPA issues two supervisory opinions

The European Insurance and Occupational Pensions Authority (EIOPA) published today two Opinions on the supervisory reporting of costs and charges by Institutions for Occupational Retirement Provisions (IORPs) and the risk assessment of IORPs that provide defined contribution (DC) schemes.

Opinion on the supervisory reporting of costs and charges of IORPs

Costs and charges can have a substantial cumulative impact: a 1% increase in costs can have a 20% impact on the amount of pension received. Hence, in order to protect members and beneficiaries, a transparent and comprehensive view of all costs and charges is essential for IORPs, social partners and supervisors. To address this, the Opinion sets out expectations on the supervisory reporting of costs and charges of IORPs.

It provides a classification of costs to be reported to national supervisors and introduces a practical guidance for supervisors and IORPs - complete with reporting templates - on how to collect data. It lays out principles for the compilation of cost information and stipulates that not only direct but also indirect costs incurred by asset managers and investment funds should be reported.

The Opinion also gives guidance on the supervisory use of cost data. National supervisors are expected to assess the cost efficiency of IORPs, the affordability for sponsors and the value for money offered to members and beneficiaries. The outcomes of the comparative analysis should be considered within the supervisory review process, including in the dialogues with the IORPs’ management boards.

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Opinion on the supervision of risk assessment by IORPs providing DC schemes

Members are more likely to suffer adverse consequences if risks crystallise in defined contribution (DC) pension products compared with defined benefit products. The supervisory approach to DC products needs to ensure that risks borne by DC IORPs are appropriately monitored and managed.

The Opinion fosters consistent supervisory practices by providing guidance on two aspects of risk management by DC IORPs. Firstly, the Opinion calls for a greater use of quantitative elements when managing operational risks, supplementing EIOPA’s existing opinion. Secondly, it expects DC IORPs to conduct long-term risk assessments by using projections of members’ future retirement income, comparing the results with the established risk tolerance of the members and beneficiaries, and as appropriate considering the IORP’s investment strategies.

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Background

The two Opinions are applicable immediately and addressed to national competent authorities as defined in Article 4(2) of the EIOPA Regulation. EIOPA is mandated by Article 29(1)(a) of its Regulation to issue supervisory Opinions to foster a  consistent and effective application of supervisory practices across the European Union. In line with Article 29, EIOPA analysed the potential costs and benefits relating to the opinions using EIOPA’s impact assessment methodology. Moreover, both opinions have been subject to a public consultation between 22 April and 22 July 2021. The Opinions are accompanied by impact assessments, feedback statements on responses received from stakeholders and the resolutions of individual stakeholder comments.