The Pandora's box of transparency

Brigitte Zypries, the German justice minister, was only trying to help. The Karlsruhe-based Federal supreme court had ruled that aspects of the existing policyholder protection laws dating from the time of Kaiser Wilhelm II were unconstitutional. In particular, the legal claims of with-profits policyholders to assets held by insurance providers were unclear. So the legal eagles under Mrs Zypries got to work. A parliamentary bill was drafted requiring that assets in excess of book value reserves would be distributed 50-50 between policyholders and insurance companies within two years.

Unfortunately, someone forgot to tell the German justice ministry that the market value of insurance assets, rather than providing an instant consumer jackpot, might actually be needed to cover the market value of liabilities, especially guarantees. A storm of industry protest followed, and the justice ministry has gone back to the drawing board.

Across Europe, arguments like this pit rules-based approaches against principles-based supervision, and book valuation against market valuation. The driving force is an inexorable move towards individual consumer rights and transparency. As we have seen with the response to Mrs Zypries, the mixture can be explosive.

The current situation in Germany is by no means unique. In the UK, we saw furious complaints from defined benefit pension funds when the UK's actuarial profession proposed bringing individual transfer values in-line with market-consistent approaches being used for funding targets. This hot potato now rests in the hands of the UK's Department of Work and Pensions.

Cross-border problems can be even more intractable when individual rights are concerned. In Switzerland, individual accruals for occupational second pillar pensions are calculated using actuarially-based discount rates and guarantee rates - calculations that are used for transfer values. One hears of multinational companies that have a pension deficit in Switzerland, according to International Financial Reporting Standards, but have to pay hefty transfer values if they make Swiss employees redundant - a clever or fiendish bit of legislation, depending on one's perspective.

If contradictions like this are to be resolved, participants have to move on from the perception that a zero sum game is in progress. And there is always danger that governments will encourage such perceptions by reacting to scandals after the fact. In the UK, scandals such as Robert Maxwell's pillaging of the Mirror Group pension fund played a role in the strengthening of legal requirements that schemes guarantee indexation to members. That was before market-based valuation exposed the cost of such indexation and squeezed the gilt markets. The Dutch system - where discretionary indexation (ringfenced from shareholders) works as a useful solvency buffer - provides an important lesson for the UK.

In the insurance sector, the Financial Services Authority has led the way in establishing a principles-based framework that protects policyholder claims and expectations. Combining financial supervision with what in countries like Germany is a separate, legal role could be the only way of avoiding the contradictions of consumer transparency.

Of course, as continental observers never fail to point out, the UK with-profits industry has struggled to recover from the twin challenges of market consistency and consumer transparency. Mrs Zypries, and her counterparts elsewhere on the continent, will need to tread carefully.