Stefan Nellshen, CFO at the €8.5bn pension fund for pharmaceutical giant Bayer, has warned that German pension funds will need to close “very substantial financial gaps” if they exposed to the full brunt of Solvency II. 

Speaking at the annual aba conference, Nellshen said meeting the “full Solvency II impact”-variant of the stress tests – referring to Example 1 in the quantitative assessment (QA) – would be “almost impossible” for most German IORPs.

“We cannot swallow enough pills to cure the headaches the application of this variant would give us,” he said.

Earlier this year, EIOPA issued stress tests for European IORPs (institutions for occupational retirement provision) to complete on a voluntary basis and added a QA exercise – including several variants on scenarios – to assess possible quantitative capital requirements and supervisory regimes.

Nellshen said some of the results of these exercises would be “critical” for most German pension funds and called on the European Commission to “abandon the idea” of the holistic balance sheet (HBS) approach with harmonised, EU-wide quantitative capital requirements.

He urged the Commission to focus instead on a more differentiated, principle-based approach to capital requirements.

Nellshen warned that the outcomes of some QA calculations suggested that financial “gaps” could be avoided only by those German pension funds with “a single, large plan sponsor that has very good credit quality”.

For pension funds with several smaller sponsors – perhaps lacking any credit rating – the QA requirements in many of the examples would be nearly impossible to fulfil, he said. 

Nellshen said the calculations for the whole QA exercise, although “simplified” compared with the quantitative impact study (QIS) of 2012, was still “very complex”, particularly with respect to sponsor support. 

Bayer PK’s CFO, meanwhile, welcomed ECON member William Hayes’s comments on the IORP II Directive, as they “did not include any mandate for EIOPA to derive EU-wide, harmonised quantitative solvency requirements”.

As for the stress test as a whole – mandatory for Bayer PK, being one of Germany’s largest pension funds – Nellshen said it was “logical and stringent”.

However, he criticised that some parameters were “far removed from practical market experience”, such as the simulated shock on real estate values of up to 63%.

“These assumptions,” he said, “might prevent investors from going into long-term real asset investments.”

He also repeated his concerns, voiced after the first quantitative impact study in 2012, that marked-to-market valuation could create “completely false steering impulses” for IORPs and lead to “extremely pro-cyclical investment behaviour”.