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IPE special report May 2018

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EIOPA sponsor-support assessment could 'mask' risk – PensionsEurope

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Proposals by the European Insurance and Occupational Pensions Authority (EIOPA) to assess the value of sponsor support could be overly simple and mask important risk-management information, PensionsEurope has warned.

The lobby group also warned that models proposed by the European regulator’s discussion paper on sponsor support ­– published over the summer and now closed to consultation – risked causing problems for companies with multiple pension funds or multi-employer schemes, such as those common in Germany and the Netherlands.

PensionsEurope’s response reiterated it does not support the proposed holistic balance sheet (HBS) approach for which the technical specifications under consideration could be employed.

However, it welcomed aspects of the consultation – such as EIOPA’s suggestion to provide a “practical and proportionate” method for measuring support by employing sponsor credit ratios.

It said EIOPA had “clearly put thought into designing a system that draws on existing information” by suggesting an approach that would seek to grade firms on a six-step scale broadly equivalent to AAA-CCC credit ratings, but that it would still demand that “detailed work” be produced by scheme advisers.

“If, as seems likely, this is additional to existing work, then it would be a significant increase in the scheme’s overheads,” the response said.

“Furthermore, it is still very unclear how to apply these ratios to group entities, multi-employers schemes, multinationals, public sector funds and industry-wide funds.

“In addition, the access to the relevant and complete information is likely to be difficult.”

PensionsEurope also raised concerns the six-step scale would fail to define the levels of support.

“For instance, there is an enormous gap between ‘weak ’ and ‘very weak’,” it said, levels that EIOPA equated to a credit rating of B and CCC in its discussion paper.

The lobby group further said the approach could result in an “oversimplification that will mask important risk-management information”, and that every approach that differed from a basic formula of a single sponsor and single IORP with one pension promise in one country would prove difficult to assess.

In suggesting other measures to assess the likelihood of a sponsor default, the response suggested that funds sponsored by relatively large companies could employ credit default swaps.

“The credit spread in the cost of funding of the sponsor could also be examined as a possible measure,” it added.

It also urged EIOPA not to penalise sponsors deemed strong by shortening the potential period for recovery payments to only five years.

“Penalising stronger sponsors is not an adequate way of regulating the pension sector,” it said. “The stronger the support, the less the imperative for shorter recovery periods.”

PensionsEurope stressed the importance of local protection funds when asked to say whether pension funds should be barred from being a creditor upon sponsor default, but it said it was “too strict” to rule out any recovery of assets, especially as this was often regulated on a national level.

It also rejected EIOPA’s suggestion that a recovery rate of 5% would be appropriate for most sponsors, saying it was “very likely” to be higher.

“For example, in Germany, sponsoring employers of Pensionsfonds are legally obliged to pay into the national insolvency protection system (Pensions-Sicherungs-Verein), which would lead to a probability of recovery close to 100%,” it said.

It therefore urged that the default probabilities be adjusted according to the individual IORP’s wishes based on the likelihood of asset recovery.

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