EIOPA approach to sponsor valuation 'inconsistent, arbitrary', says USS
The Universities Superannuation Scheme (USS) has warned that the European Insurance and Occupational Pensions Authority’s (EIOPA) proposed approach to valuing sponsor support risks being arbitrary and applied inconsistently.
The £38.6bn (€45.2bn) pension fund, the UK’s second-largest, also said evaluating the support of its higher education sector sponsors would require a “very significant” use of resources, and urged the regulator to conduct further work on potential methodology.
In its eight-page response to EIOPA’s discussion paper on sponsor support technical specifications, seen by IPE, USS said it was unclear how the proposals would “deliver any extra insight” on sponsor stability compared with the existing system.
“It could be argued that the alternative approach is overly simplistic and mechanistic,” the response said, echoing concerns by lobby group PensionsEurope.
“The assessment of sponsor support should rely on the judgement of the trustees supported by their professional advisers, so a broad principles-based approach, rather than calculating a single number, should be adopted that would reflect the variety and diversity of IORPs,” the response continued.
It also rejected proposals by EIOPA to adopt asset or income covers – which the regulator argued in the discussion paper were already successfully deployed by banks to assess creditworthiness – as a means of gauging sponsor strength.
Citing the example of a technology company where its value stemmed from intellectual property and brands, USS said: “The asset cover would be low, and sponsor support may be identified as weak.
“This would not reflect the real value of the business and could lead to actions that would be damaging for the sponsoring employer and IORP. Similar weaknesses may be identified in respect of income cover.”
The fund further warned about the practicality and cost involved in assessing covenants for multi-employer schemes such as USS, which caters to nearly 400 institutions.
“The time and resource required to collect and collate the data needed to value sponsor support under the alternative approach would be very significant, especially given the arbitrary nature of any formulaic output.
“If EIOPA does wish to proceed with this type of approach, a great deal of further work would be required on the above areas,” it said.
Its concerns were echoed by the National Association of Pension Funds, which in its own discussion paper response said it would be “impossible” to operate the sponsor valuations in the non-profit or multi-employer sector – both labels applicable to USS sponsors.
The NAPF said it would prove ”completely inappropriate” to apply a methodology based around credit ratings and data derived from corporate bonds and credit default swaps to the non-profit sector.
The UK lobby group also said EIOPA would be “well advised” to discontinue work on sponsor support – and, by extension, the holistic balance sheet – until the revised IORP Directive with new governance and disclosure guidelines had passed.
“Many IORPs do not have the resources to consider both sets of issues, and there is a risk the debate on sponsor support and the holistic balance sheet will distract attention from securing the best possible outcomes on governance and disclosure,” it said.