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Germany's aba sides with European Council on IORP II risk evaluation

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Provisions for EIOPA approval of pension scheme transfers and for risk assessments to include ESG matters should be among others left out of the final version of the new EU directive on occupational pension funds (IORP II), according to aba, the German pension fund association.

The association, like others, set out its key demands for the negotiations between the European Parliament, the European Commission and the European Council on the revision of the directive.

The trialogue started on Monday.

The Parliament’s proposed version of IORP II was the last to be developed, via the Economic and Monetary Affairs Committee (ECON), which voted on it in late January.

The preliminary date for the plenary of the Parliament is 10 May, according to aba. 

The association set out its main priorities for the negotiations yesterday, doing so in relation to the ECON’s proposal for the dirctive.  

It makes six main demands, relating to matters such as risk evaluations for pensions and the holistic balance sheet (HBS), the rules for transfers of pension schemes, and the rules for the calculation of technical provisions.

According to aba, the ECON’s version of IORP II would allow for the introduction of the HBS “through the back door”.

It has therefore called for the Council’s position on “risk evaluation for pensions” (REP), the term aba prefers, to be adopted.

It said the ECON and Commission’s version of Article 29 (on risk assessment) were unclear and that the requirements could therefore in practice develop into the HBS, “in particular when EIOPA adds further guidelines”.

The implementation details of the risk-evaluation requirements should be left to member states, as per the Council’s text, and “there should be no room for EIOPA guidelines, which could then potentially result in a harmonised quantitative approach for the whole EU”.

PensionsEurope this week called for the European Insurance and Occupational Pensions Authority (EIOPA) to develop principles-based guidelines instead of an HBS approach, while the Dutch Pensions Federation expressed a similar view.

Both are strongly opposed to the HBS and potential associated solvency requirements.

The aba’s position on the risk-evaluation requirements for IORPs is at odds with those of several, seemingly mainly UK-based responsible investment organisations, as the German association has called for the deletion of an article in the ECON proposal that recommends pension funds take into account “new or emerging risks, including risks related to climate change, use of resources, the environment, social risks and risks related to the depreciation of assets due to regulatory change”.  

“A sensible implementation of the rule by IORPs is not possible,” the aba said.

UK responsible investment charity ShareAction and 11 other civil society organisations are soliciting support from the European Council for the ECON’s language on integrating ESG factors into investment risk management.

No to EIOPA say on transfers

The aba has also opposed an ECON amendment to the Council IORP II proposal relating to calculating technical provisions of liabilities (discount rates).

Specifically, it called for the removal of the word “current” inserted before a reference to the requirement that market yields of specified types of bonds should be taken into account when determining the interest rate to be used.

The ECON proposal’s provisions for calculating technical provisions based on market value would be harmful for German IORPs, according to aba.

It would, for example, lead to results showing significant underfunding, in particular if a nearly risk-free interest rate term structure is used, as was the case in the EIOPA stress tests, and higher volatility. 

“IORPs have organised their whole structure along a valuation with a fixed tariff discount rate – a change is not that easily possible,” said aba.

“That the market interest rate temporarily falls under the interest rate in the business plan does not mean that, in the very long run – which characterises occupational pensions – the promised benefits permanently cannot be financed.”

Some other pension industry participants have given mixed feedback on the significance of the specification that the market yields to be taken into account should be “current”.

One source thought the amendment was “rather innocuous”, and that the directive had always given a choice of market or expected yields, while a UK policy specialist told IPE it was unclear exactly what the wording meant, or what difference it might make.

The German association also called for the final IORP II Directive to differ from the ECON’s version in relation to certain pension scheme transfer aspects.

“The rules on the transfer of pension schemes as proposed by the ECON Committee in Article 13 and in the new Article 3a are neither adequate nor will they work in practice,” the aba said.

Article 3a should be removed, it said, as it would give inappropriate new powers to EIOPA, namely to approve transfers of pension schemes.

“No competencies that can be better addressed by national authorities should be transferred to the EU supervisory authority EIOPA,” it said.

If a complete deletion of Article 3a is not possible, it added, then “the future EIOPA involvement ‘at the request of the competent authorities’ should at least be limited to systemic risks”. (aba own emphasis)

Concern about Article 3a, on “duty of care”, is also shared by others.

Philip Shier, senior actuary at Aon Hewitt* in Dublin, told IPE the article was a late-stage amendment and that the additional assessment by EIOPA “seems unnecessary” and could be viewed as hurdle by those considering transfers.

The aba, meanwhile, said a requirement to be fully funded – as proposed in Article 13, paragraph 1 – is only justified for cross-border transfers of pension schemes but not transfers within a member state.

Another change called for by the aba is the deletion of all ECON additions regarding intergenerational balance “because this cannot be achieved through supervisory law”.

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