mast image

Special Report

Impact investing

Sections

EFRP slams 'huge complexity' of holistic balance sheet in impact study response

Related images

  • EFRP slams 'huge complexity' of holistic balance sheet in impact study response

EUROPE - The consultation on the first proposed quantitative impact study (QIS) of the proposed holistic balance sheet (HBS) is not "sufficiently comprehensive" to serve as a basis for a revised IORP Directive and seems to have been copied and pasted from the European Commission's Solvency II framework, the European Federation for Retirement Provision (EFRP) has claimed.

Responding to the European Insurance and Occupational Pensions Authority's (EIOPA) consultation paper on the first QIS for the HBS approach within the revised directive, the EFRP said it welcomed the fact that some "unique" characteristics of IORPs had been taken into account in the HBS proposals.

However, in the response seen by IPE, the association argued that the proposed HBS model would be an "unworkable tool" for IORP supervision due to the "huge complexity" and "subjectivity" of the selected assumptions.

According to the EFRP, the consultation paper on the QIS included numerous Solvency II elements and, with the association fearing that the framework for insurers would be applied to IORPs directly.

"A large part of the QIS consultation document seems to have been [copied and pasted] from the Solvency II Dsaysirective despite the European Commission's promises that the IORP revision would not be a copy-paste exercise," it said.

Further, the consultation paper failed to address the "most important" question according to the association, relating to the direct implementation of the HBS by pension schemes.

"If it is to replace the existing scheme-specific funding regime, then clarity is needed about what kind of recovery periods will be permitted," the EFRP said in its response. "This would have a direct and very significant impact on pension schemes, employers, employees and the entire economy."

Additionally, the EFRP said the technical specifications of the proposed QIS show that "a lot of different" and "subjective" assumptions have to be made in order to calculate the HBS.

"This makes the HBS very sensitive to model risk: the accumulation of assumptions leads to an accumulation of insecurities," it said. "The EC's aim of making schemes comparable appears unfeasible."

The EFRP therefore opposed the HBS model as an "inappropriate" supervisory tool to measure long term-liabilities and the investment horizon by IORPs.

It also reiterated that some "crucial" elements in the prudential framework were still unknown, such as the length of recovery periods and how to tier assets and liabilities such as a country's pension protection scheme or an employer covenant, making it impossible to calculate the impact on contribution levels, sponsors and pension benefits at present.

The EFRP further voiced concerns about schemes' ability to provide cost effective occupational retirement savings.

It said: "The proposed risk-based capital requirements and valuation with the risk-free interest rate, especially if based on a flawed definition of risk and short-term market based parameters, are inherently volatile as well as pro-cyclical and will endanger the stability and long-term sustainability of IORPs.

"Given that Solvency II is itself based on the capital adequacy framework for the banking industry, which has a very different business model to insurance, we fear that the convergence of behaviour influenced by regulation will increase the risk to the financial system and the wider economy."

The association remained sceptical whether the IORP Directive revision process would result in more cross-border pension provision, which was one of the initial reasons for the review.

Instead, the association believed the EC's focus should first and foremost be on stimulating supplementary workplace pension provision rather than on cross-border pension activities.

Finally, the EFRP called on the Commission to allow EIOPA more time to elaborate a "suitable" prudential framework for IORPs, finding "very hard" for EIOPA to come up with an adequate advice due to the "very tight" timeframe imposed.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2559

    Asset class: Multi Assets.
    Asset region: -.
    Size: EUR 15m (may be split into two mandates EUR 7.5m).
    Closing date: 2019-09-06.

  • QN-2560

    Asset class: Private Equity.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

  • QN-2561

    Asset class: Infrastructure.
    Asset region: Global.
    Size: $40m.
    Closing date: 2019-08-30.

Begin Your Search Here
<