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Dutch Pension Federation calls for holistic framework over HBS

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  • Dutch Pension Federation calls for holistic framework over HBS

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NETHERLANDS - The consultation on the first proposed quantitative impact study (QIS) for the holistic balance sheet (HBS) fails to analyse the impact on a country by country basis and, with more detailed guidance required, the Dutch Pension Federation has claimed.

The industry body further urged more clarity on the potential use of both prudential and holistic frameworks, rather than opting for the introduction of the HBS.

In its response to the consultation paper on the QIS exercise for the revision of the IORP Directive launched by the European Insurance and Occupational Pensions Authority (EIOPA) in June, the Dutch association said it had "serious doubts" about the proportionality of the exercise and was "very concerned" about the costs it would generate for pension funds and ultimately for the beneficiaries.  

The Federation also argued that assumptions directly derived from the Solvency II framework for insurers were currently too board and needed to be developed further to directly relate to the specific nature of an IORP.

This point was clearly illustrated by the fact that some elements were still missing from the consultation process for the QIS said the Federation, such as an inflation risk module and the valuation of security and adjustment mechanisms, which are directly correlated to IORPs.

It therefore called on EIOPA to conduct further quantitative impact exercises in order to assess the real impact the holistic balance sheet would have on European occupational pension schemes.

The Federation however suggested that, rather than rushing through these exercises, an examination of existing good practice would also be necessary.

"It could be worth studying in-depth the experiences of the current reforms of the Dutch FTK, a risk based supervisory framework with market consistent valuation, which is under reconstruction", it added.

The FTK - or financial assessment framework - replaced the fixed 4% discount rate for liabilities of Dutch pension funds when it came into force in 2007.

It prescribes a mark-to-market discount rate for nominal liabilities as well as using a value-at-risk assumption of 97.5% certainty for the recovery of assets within a one-year period and applies a nominal coverage ratio of 105% plus risk buffers.

Another reason why EIOPA should conduct further QISs, according to the Federation, is to be found in the use of aggregate data.

It said the use by the authority of aggregate data could make "impossible" an adequate comparison of the outcomes for pension funds and countries, arguing that EIOPA would not get sufficient insight in the underlying assumptions of the stochastic analysis, which may differ significantly between individual IORPs.

The Dutch Federation also regretted the uncertainty around the applicable prudential framework.

"Without the prudential framework and clarity on items like trigger points for interventions," it continued, "recovery periods and tiering, the real economic impact on contributions and pensions cannot be calculated and therefore there will not be insight in the impact on sponsors and beneficiaries.

"This impact analysis is far more important than calculating the technical provisions and the capital requirements.

"In this respect, we think that the QIS seems more tailored for correct valuation than for chartering the impact of using the HBS framework."

The sentiments are similar to concerns raised by the European Federation for Retirement Provision in a consultation response seen by IPE earlier this week.

In addition, the association claimed that the prudential framework would determine the value of the adjustment and steering instruments.

"An impact analysis of those issues is far more important than calculating the technical provisions and the capital requirements," it added. "We would advocate a separate consultation on adequate recovery periods, since there are significant differences between member states."

The Federation finally conceded that it did not know whether the HBS would work in practice, as it is not sure whether the HBS was aimed at supervising the institution or the pension scheme itself.

"For multi-employer plans," it said, "it is extremely difficult to calculate sponsor support. With a complete pension contract, where it is clear how surpluses and deficits will be shared between the different stakeholders, the HBS will by definition lead to a cover ratio of 100%.

It concluded that it therefore had "strong doubts" about the informational value of the holistic balance sheet.

The Federation instead proposed having a holistic framework rather than a holistic balance sheet, which would give "more freedom" to member states to calibrate that framework to the local pension system.

"We suggest alternatives such as an ALM [asset-liability management] study or stress tests for your consideration," it said, arguing that this would be a better arrangement than the HBS.

"If a continuity analysis involving over a thousand different scenarios results in an IORP managing to be stable with the help of steering mechanisms, this can provide better information than a HBS with all the present insecurities and disadvantages," it insisted.

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