News analysis: Regulators stick with 25% property shock
EIOPA has included a 25% capital charge for property in its latest recommendation for new pension fund regulations. Richard Lowe reports.
This week, regulators confirmed once more their intention to apply a 25% capital charge to real estate investments held by European pension funds and insurance companies.
The 25% shock factor - widely criticised for being unduly high and having the potential to divert institutional capital away from the asset class - was included in the European Insurance and Occupational Pensions Authority's (EIOPA) recommendations to the European Commission for new pension fund regulations - namely, the IORP Directive.
The release of EIOPA's draft technical specifications for a quantitative impact study of the IORP Directive comes soon after an industry consultation that prompted a joint industry response from real estate associations INREV, EPRA, BPF, Fastighetsägarna, IPF, ZIA, RICS and AREF.
Despite the European Commission claiming publicly that the IORP Directive would not 'cut and paste' rules from Solvency II insurance company regulations, the 25% solvency capital requirement (SCR) appears firmly woven into both. There is potential still for both the IORP and Solvency II to be modified, but the treatment of real estate is some way down the regulators' agenda, below more politically sensitive items.
John Forbes, real estate funds partner at PwC - who earlier in the year called on the real estate industry to "make its voice heard" on matters relating to IORP and Solvency II - told IP Real Estate he was "very sceptical that anything would change", referring specifically to the latest confirmation of the 25% shock factor.
However, Jeff Rupp, director for public affairs at INREV, was more hopeful now that both the insurance industry and pensions industry had been mobilised over what was effectively a single cause. "The political reality is that adding the voice of the pensions industry to the insurance industry is actually more liable to make policymakers take notice of the arguments," he said. "There is just more at stake."
It is understood by those close to developments in Brussels that EIOPA may carry out another Solvency II impact assessment before the end of the year, and those involved in lobbying on behalf of the real estate industry will want to use this short window to get the SCR issue onto the agenda.
Meanwhile, large insurance companies have been working on their own internal models that look in more detail at their investments to arrive at more accurate - and unique - levels of capital reserve, potentially enabling them to apply a lower charge for real estate. These same insurers have been sharing their data with national regulators.
INREV has sought to bring together insurers to develop what it calls the Internal Model Data Matrix in a bid to make it easier for the industry to build and share knowledge of the data sources and calculations required for the effective creation of internal models.
Rupp said INREV was hopeful that the greater level of data being provided to regulators would help lead to an eventual "reassessment of the property SCR".
Solvency II is due to be brought into action in January 2014, but, last month, press reports suggested that it could be delayed further due to wrangling among EU member countries. Rumours are of a division between the German insurance industry, which would prefer to overturn Solvency II entirely, and others that have already incurred the necessary costs and resources.
Perhaps the biggest hope for opponents of Solvency II - and, by extension IORP - is that it will be to difficult to push through. Many in the industry have taken heart from the latest rumoured delay to this end.
However, as one Dutch insurer told IP Real Estate, the real estate industry - especially fund managers - should not read too much importance into the potential for delay in and of itself. Many of the big insurers will be pressing ahead in line with their schedules regardless.
"Even though the official regulation might be delayed," the insurance company said, "big insurers have timelines for their internal models in agreement with their local regulators, and that is not necessarily directly linked to the formal starting point of Solvency II."