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EIOPA throws support behind 'holistic balance sheet' approach

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  • EIOPA throws support behind 'holistic balance sheet' approach

EUROPE - The European Insurance and Occupational Pensions Authority (EIOPA) has backed the 'holistic balance sheet' (HBS) proposals in its advice to the European Commission on the revised IORP directive, while recommending changes on Solvency II options and proposing a 'key information document' for defined contribution (DC) schemes.

In its 515-page response - which takes into account all of the industry's responses to the Commission's Call for Advice - EIOPA argued that many national supervisors already had HBS approaches in place in everything but name.

However, it stressed the need to conduct a full impact assessment on capital requirements for the revised IORP directive before taking a final decision on the matter.

The authority also claimed that the creation of a holistic balance sheet would require the specification of the items and the rules to be included.

It said: "It must be emphasised that, [while] the achievement of the Commission's objective requires the use of a holistic balance sheet or a similar framework, it has not yet been demonstrated that the calculation of the necessary values is practicable or does not involve unacceptable complexity.

"The use of the holistic balance sheet framework does not in itself imply a common European solvency standard: such a common standard results only when the framework is combined with common rules for the calculation of the elements of the holistic balance sheet."

It said the HBS was the "most practical means" to achieve the Commission's objective of a common security standard because, "only by including and identifying and quantifying on a consistent basis all security resources can the level of security be compared"

Respecting Solvency II measures, the authority insisted that some options should be "adjusted" for cross-border vehicles, as they were currently "inappropriate".

In its advice, the EIOPA said the revised IORP directive should require that IORPs regularly conduct an Own Risk and Solvency Assessment (ORSA).

"In particular, the scope of ORSA should include consideration of the IORP's overall solvency needs, taking into account the specific risk profile, approved risk tolerance limits and business strategy," it said.

"It should also take into account a continuous compliance with the requirements for technical provisions and solvency capital as prescribed by the revised IORP directive."

However, EIOPA conceded that ORSA should not subject schemes to qualitative measures that were "disproportionate" to their risk profiles.

It therefore recommended including enough flexibility for member states and supervisory authorities to conduct scheme-specific exercises. The IORP - overseen by its national supervisor - would then undertake risk assessment appropriate for the risks it faced.

Commenting on EIOPA's advice to the Commission, Dave Roberts, senior consultant at Towers Watson, told IPE: "EIOPA has kept multiple solvency options on the table, which risks the European Commission ploughing ahead as it pleases. The Commission must not be allowed to build an unstoppable momentum."

With respect to DC regulation, EIOPA argued that information needed to be "relevant, correct, understandable and not misleading".

It called for the introduction of a key information document for all DC schemes, which would allow members "to have confidence in the scheme irrespective of where it is located in the EU".

It has submitted its advice to the Commission only weeks after it outlined a provisional timetable for the conduct of quantitative impact studies (QIS) on the HBS approach.

Following the announcement made by EIOPA chairman Gabriel Bernardino at a conference in Brussels in January, several pension figures decried the lack of details on HBS measures and questioned the feasibility of launching a QIS on that particular issue.

In a previous interview with IPE, James Walsh, senior policy adviser at the UK's National Association of Pension Funds, said: "It is remarkable that, with such a wide document, there are so little details about the HBS.

"This proposal would lead to a massive increase in pension schemes funding on a scale that would rapidly lead to the closure of defined benefit pension schemes."

Towers Watson's Roberts said the Commission should have given itself more time to implement a new IORP directive.

"If the Commission is to take seriously the contingent nature of EIOPA's advice, then its desired timescale for delivering a draft IORP II Directive - by the end of the year - should be reviewed."

EIOPA is now set to publish its proposed approach on HBS measures, as well as a timeline for the full impact study, in the coming weeks.

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