EUROPE - The European Commission has recognised the importance of allowing pension schemes participating in the first quantitative impact study (QIS) for the revised IORP Directive to submit results based on a Value-at-Risk (VAR) below 99.5% confidence levels, after the measures raised concerns in the industry.

Writing to the European Insurance and Occupational Pensions Authority (EIOPA) last week to give its green light for the launch of the QIS for the implementation of a holistic balance sheet (HBS) within the IORP II Directive, Jonathan Faull, director general of internal markets and services at the Commission, said it was "important" QIS participants submit results based on a VAR at the 99.5%, 97.5% and 95% confidence levels.

The move came after the pensions industry recommended EIOPA conduct stress tests at two other confidence levels rather than conducting stress tests at a 99.5% level only.

In its response to the consultation paper on the QIS exercise conducted by EIOPA this summer, the Dutch Federation of Pension Funds recommended deriving results at 97.5% and 95% security levels.

It added: "[Changing confidence levels] is not possible without recalculating all modules, as the effects of the different steering and adjustment mechanisms will not be linear.

"Given that EIOPA intends to perform only one QIS before the EC presents a draft IORP Directive, explicit calculation of at least the 97.5% and 95% security levels should be included in this QIS and asked to be calculated by the IORPs themselves."

The EIOPA's Occupational Pensions Stakeholder Group (EIOPA OPSG) echoed those remarks, arguing that it was unclear how EIOPA would infer other security levels from the calculations on a 99.5% level.

"Due to the (option) valuations of the adjustment and steering mechanisms, other security levels cannot be derived from the 99.5% level since there is no longer a normal distribution," the group said.

EIOPA OPSG went even further in its response, saying the events of recent years had shaken confidence in the underlying assumptions of the HBS.

"Indeed, these model risks are not new," the group added. "Unfortunately, they did not receive adequate consideration when VaR became a prudential tool for the banking and insurance sectors.

"Consequently, we have concerns about the wisdom of using VaR as a supervisory tool for the pensions sector."

Additionally, Faull stressed in the Commission's letter to EIOPA that the matching adjustment of the discount rate was not part of the benchmark scenario, but would be tested as an option.

"It is proposed to also test the extended matching adjustment and the latest industry proposal in this respect," he said.

"This will allow for a comparison with the forthcoming technical assessment done by EIOPA in the context of the Omnibus II Directive.

"As soon as an agreement has been reached, by early November at the latest, we will add the technical specifications for matching adjustments."