Retirement and financial law. Dr. Jacques-André Schneider Lawyer University of Lausanne

Transcription

1 Retirement and financial law Dr. Jacques-André Schneider Lawyer University of Lausanne

2 The topics The argument for retirement savings Equity-bias with collective protection Three legal vehicles Solvency II: short-term security illusions IAS 19 and destructive volatility Taxes Governance: diligence, loyalty and fraud

3 Why retirement savings? (1) Who pays retirement benefits? Whether funded or unfunded, pensions are paid out of present economic output Funding helps smooth the contribution load over time e.g. FRR Funding protects against insolvency in decentralised pension plans

4 Why retirement savings? (2) Other arguments? Linking of benefits to economic/market development Increased savings? Liquidity and depth of financial markets? At the end of the day The worth of funded pensions depends on the wealth generated and protected in the global economy

5 Equity-bias: collective protection?(1) Funded pensions depend On the real wealth in tomorrow s economy (60 year span) On the long-term performance of real (equity-like) vs nominal assets Risk and volatility Are therefore higher on the short-term (3-10 years)

6 Equity-bias: collective protection?(2) Collective funding is mandatory The individual cannot take-up risk and diversify like a big institution Yale Endowment APB/PGGM/Nestlé/Shell pension funds But mandatory collective protection is necessary The individual is not alone vs volatility In general, the individual does not contribute enough, sufficientléy early and regularly Retirement savings need protection

7 Three legal vehicles (1) Funded insurance undertaking Year-by-year individual nominal guarantee Solvency rules insist on nominal returns and short-term, absolute security No temporary undercoverage allowed Equity-like, long-term returns are impossible Not adequate for retirement funding

8 Three legal vehicles (2) UCITS Undertakings for collective investment in transferable securities Equity-like returns are possible No collective, nominal security for retirement funds No pension annuities

9 Three legal vehicles (3) IORP Institution for occupational retirement provisions Equity-orientated (70% max. allocation) Collective vehicle that allows for temporary undercoverage and multi-year recovery period (not cross-border) Can pay retirement annuities, survivors and invalidity benefits

10 Solvency II (1) Developed for insurance undertakings 1st Pillar Solvency capital, minimum capital requirements, technical provisions, ALM 2 nd Pillar Risk governance 3rd Pillar Market transparency and financial communication Swiss insurance swiss solvency test (SST) prefigures

11 Solvency II (2) The main results Very little equity (5 to 10%) Bonds dominate Some real estate Asset performance largely below longterm retirement funding expectations and income-level security

12 Solvency II (3) What should IORP solvency be? Asset allocation on the EU continent 35-50% equity 20-35% bonds Real estate, private equity, infrastructure, hedge funds, commodities for the rest (less liquid) Solvency capital From 5% to 40% above technical provisions, with a reasonable recovery period for undercoverage in adverse markets

13 Solvency II (4) ALM should be calculated on a longer term basis, including salaried persons future benefits Ongoing pensions don t have to be totally matched with an indexed bond portfolio It s actually an issue of young/old solidarity Risk governance and financial transparency must be fully developed Insolvency guarantee fund, with liability remedies

14 IAS 19: destructive volatility IAS 19 is a standard by EU law Pensions are an a employer liability The IORP is not an independant financial organisation True and fair view Implies destructive yearly volatility for employer financial accounts Strong discouragement for occupational pensions

15 Taxes Funded occupational collective pensions thrive on Exempt/Exempt/Tax New tax levies in Great Britain, possibly Germany on collective pension fund assets and returns are no help at all

16 Governance Diligence and transparency New level of governance adapted to the size and the reponsibilities of independant pension funds Paritarian governing boards Necessity of financial independance, other than contributions, from employer Loyalty and fraud Conflicts of interest and sanctions

17 Conclusions (1) Specific solvency rules for equitytilted IORP s i.e. solvency rules for insurance undertakings should not be applicable Facilitate mandatory collective coverage, incl. annuities i.e. avoid UCITS-only approach as IORP Independance of pension funds i.e. avoid IAS 19 volatility

18 Conclusions (2) Tax-friendly EET Specific governance rules Enable paritarianism Combat conflicts of interest and fraud