Friday, April 28, 2006

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.

Wednesday, April 26, 2006

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.

Tuesday, April 25, 2006

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.

Monday, April 24, 2006

Norway / EEA

As mentioned earlier, the EEA, or more specifically, the EEA Joint Committee is still labouring with the transposition of the Pensions Directive into EEA law (via IPE). The expectation remains that the Norwegians will have worked out their difficulties until the next meeting of the JC, scheduled for 2 June.

Sunday, April 23, 2006

Live long & prosperously

It is a truism that increasing longevity (as documented strikingly here) will put static retirement provision systems under severe stress.

It is all the more interesting to compare different institutions' approaches to the issue, as represented by UBS' recent research focus Demographics: a coming of age and Ageing and Pension System Reform: Implications for Financial Markets and Economic Policies, a November 2005 supplement to the OECD Financial Market Trends publication.

UBS evaluates ageing from a macroeconomic model point of view, apparently employing steady state equilibrium models. With these, it is attempted to establish the impact of ageing on several countries' economies as a whole (production, productivity, income, consumption), on financial markets (asset allocation, emerging markets, real estate) and on different industries (consumer, technology, health care and financials). From the magnitude of the task and the nature of the tools used, it is hardly surprising that the results of their work barely scratch the surface of the obvious. Given the study's ready understandability and pedagogic outreach to the general public, this would not be so bad, if only public policy implications were less fuzzy. There are no useful items with regards to pan-European pensions.

The OECD paper has a very different approach, given its G10 Executive target audience. Where UBS works with theoretical models, the OECD looks at empirical data and deploys microeconomic concepts to come to relevant policy conclusions. There are many interesting considerations of the current supply situation of fixed interest instruments given the ongoing shift in funds' asset management due to liability matching objectives and up to date cross country comparisons. Comparing the paper's general thrust to the Pensions Directive, it appears that the Directive is in line with state of the art best practice, especially as far as the Prudent Person rule is concerned, which it introduces to EU legislation and many member countries which have hitherto used quantitative restrictions (as are still in effect in Switzerland). This paper is an interesting read for the expert.

Thursday, April 20, 2006

Speed & Transparency 2015

I like this IBM interpretation of a recent EIU study of "Financial Markets 2015". In short: Financial Services are characterised by increasing speed & transparency, which leads to the evaporation of agency trade profitability. This shifts the balance of power towards the investor. Ultimately, the industry distinction between buy/sell side & processors may be replaced by principals & advisers. But of course, there's lots of other useful insights.

European Pensions for Switzerland

A project group of Innovation Second Pillar is currently evaluating options for extending the Pensions Directive's cross border regime to Switzerland and vice versa. With Switzerland not being part of the EU nor of the EEA, this constitutes a major impediment for otherwise highly experienced Swiss service providers. It also dispossesses Swiss firms with employees in the EU of potential economies of scale by forcing them to maintain dual structures.

The Pensions Directive is technically still not part of the legal body of the EEA at this point. This technicality is expected to be removed by May of this year, however. Nevertheless, the Principality of Liechtenstein, with which Switzerland has close ties, is part of the EEA and plans to transpose the Directive into its law by 1 January 2007. We are keeping a close watch on what is happening in the neighbourhood.


The July 2004 issue of PWC Investment Management Perspectives (Google has stumbled across it only now for some reason) has a good section on pan-European pensions. While some of the transposition information is naturally dated by now, the fundamental arguments remain the same. I also like the figure on page 45 which displays the tax regimes of non-EET countries with regards to occupational pensions.

Wednesday, April 19, 2006

Commission takes action

The EU Commission has issued a reasoned opinion against Belgium, Cyprus, Czech Republic, Finland, France, Italy, Lithuania, Slovakia, Slovenia, Spain and the United Kingdom for non- or partial transposition of the Pensions Directive into their national law, thereby capturing all the member states that it has identified earlier for lagging. The next step in the infringement proceedings according to Art. 226 EU Treaty would be court action in front of the ECJ after two months time (via IPE).

Saturday, April 08, 2006


I've been invited to speak at the IASC Foundation Conference in Frankfurt about financial analysts' views on convergence of accounting standards, specifically the convergence of US GAAP and IFRS. Rather than going into the details, I addressed the direction which convergence should take in the longer term by summarising the 12 principles of the Comprehensive Business Reporting Modell of the CFA Institute. There were a lot of sceptic vibes to be felt from the huge audience (some 400 people), especially from preparers of financial statements about the full fair value postulate. But there you are: debate is only advanced by bold ideas - I think I can say that since those ideas are not mine alone. The presentation is available online.