Supervisory cooperation EU/CH

Earlier this month, CEIOPS and Swiss FOPI have signed a Memorandum of Understanding (press release) covering the procedures of cross border supervision of insurance groups. This MoM is interesting in that it is the logical consequence of the 1989 Insurance Agreement between Switzerland and the EU, which extends the EU's freedom of establishment to Swiss insurance undertakings.

From a pensions viewpoint, there are two relevant aspects: 1) The MoM might serve as a blueprint for cooperation in the pensions arena. This presupposes however that there is 2) a supervisory body of Swiss IORPs which is capable of filling the same rôle. Currently, it is questionable whether that rôle might be filled by the FSIO, which does not act as a direct supervisor to IORPs. We note however that, generally speaking, insurers seem to be well ahead of the "pensions pack" with regards to European market access. Their specific advantage with regards to market access to the new pan-european pensions market seems to be limited, though, since Appendix 2 of the Insurance Agreement appears to exlude such business lines from the scope of the Agreement.

Transparent longevity assumptions

Interesting! Following a January call of an informal group of London's leading investment bank and fund management analysts (the "Corporate Reporting Users Forum"), a number of companies have started publishing and thus exposing to be challenged their longevity assumptions used for the valuation of pensions schemes, which are obviously critically important (via FT). Virtually at the same time, an assessment of pensions liabilities of 26 Swiss SMI-component firms has been published (via Vorsorgeforum). The average discount rate applied, while being in line with Swiss legal requirements, is an unsustainably high 4.25% (down from 4.61%). I suspect that longevity assumptions are not published.

This is precisely the way ahead with full fair value valuations as well, especially in those cases where price information is not directly attainable. There needs to be a critical dialogue between users and preparers of financial statements concerning assumptions used. This dialogue obviously checks preparers' position of power, which is probably why they are often reluctant to participate in that dialogue.

Swiss discussions

Here is an interesting discussion paper by Nestlé's Martin Wagner which has gone to all members of the Swiss Chamber of Pensions Experts, without generating a great deal of discussion, unfortunately.

Meanwhile, I've joined IZS's project group on Pan-European Pensions, which has held a very productive meeting yesterday. An in-depth public information event on the subject matter is probably forthcoming shortly.

Pensions in M&A

While this highly acclaimed new Corporate Finance textbook with its fresh angle from political economy doesn't even mention pensions as an index entry, this interesting IFRS update article makes the point that - even under the regime of IAS 19 - pensions need not be a deal breaker, they are merely an important pricing factor.

If that is so, then there is probably a case to be made for consolidating a firm's pensions operations in one European IORP, especially if the transaction reaches across borders. In a takeover, the seller will be able to put a price tag on improved transparency and risk management capabilities of such a structure, as opposed to the incumbent compartmentalised country solution. This better price tag is likely to go some way in covering the set-up cost of setting up such structures.

Second pillar without frontiers

Here is an article (German) that I've published in Schweizer Bank a while back. Unfortunately, there wasn't much feedback on it to date.