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EIOPA outlines views on valuation, capital requirements of IORPs

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  • EIOPA outlines views on valuation, capital requirements of IORPs

EUROPE - Valuations for IORPs should be "market consistent" and include the "actuarial value of all enforceable pension promises", according to the European Insurance and Occupational Pensions Authority (EIOPA).

In its response to the European Commission's Call for Advice on the revised Institutions for Occupational Retirement Provision (IORP) directive, EIOPA said its recommendations for the valuation and capital requirements of IORPs had been based on the principles of "transparency, comparability and comprehensiveness".

It also recommends the holistic balance sheet as the means of including all "security mechanisms", although it concedes that its adoption in practice should be "subject to further investigation".

The authority also takes pains to draw attention to the Commission's stated objective of a common level of security for retirement benefits.

"Whether this objective is accepted is a political matter, which also potentially has other implications," EIOPA says. "Its rejection would necessitate a review of some of the advice."

It also points out that its response "does not consider the question of whether or not Solvency II is the correct starting point", adding that many consultation respondents believe it is the "wrong initial framework" for considering the capital requirements of IORPs.

Respecting valuations, EIOPA said they should be "market consistent and include the actuarial value of all pension promises of the IORP".

It agrees with the requirement of Solvency II that assets should be valued on a market-consistent basis and calls on the Commission to review Article 15 of the IORP directive on the valuation of liabilities.

With respect to the holistic balance sheet approach, EIOPA supports the concept but insists on the need to conduct "further investigation" through a full impact assessment before implementing the measures within the revised directive.

It says: "EIOPA's advice in this section is consistent with the Call for Advice's objective to increase the level of harmonisation and the holistic balance sheet proposal, and with the Commission's objective of achieving a common level of security for all IORPs.

"EIOPA would like to stress that this not necessarily implies that these options are preferred over the other options presented in the explanatory text, which are more in line with the existing IORP directive.

"It would therefore be preferable to achieve agreement about the question of a common level of security before making decisions about other matters considered in this section."

Referring to Solvency II capital requirements, EIOPA recommends amending the text requiring all types of IORPs to adopt a risk-based solvency capital requirement and stresses that separate articles would be necessary to take into account security and benefit adjustment mechanisms.

It acknowledges, however, that it does not have strong views on these issues for the time being, "as more insight is needed on fundamental issues concerning the global prudential framework".

EIOPA finally recommends requiring IORP vehicles to regularly conduct an Own Risk and Solvency Assessment (ORSA), which would include consideration of the IORP's overall solvency needs.

However, it accepts that the precise scope, the level of complexity and the sophistication of the ORSA would depend on the specific risk profile of the IORP, whether it is a defined contribution scheme or a pension vehicle/plan sponsor bearing the risks. 

"EIOPA therefore suggests including sufficient flexibility in the Level 1 text that will enable member states and supervisory authorities to adjust the scope of ORSA for different risk sharing mechanisms," it says in its advice to the Commission.

"The revised IORP directive should enable supervisors to conduct the scheme-specific exercises, where the IORP, overseen by its national supervisor, undertakes risk assessment activity that is appropriate for the risks it faces."

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