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EIOPA calls for renamed HBS but holds fire on capital requirements

The European Insurance and Occupational Pensions Authority (EIOPA) has called for European occupational pension funds to be required to carry out a “standardised” risk assessment on the basis of a common framework but shied away from backing the introduction of harmonised capital or funding requirements “at this point in time”.

The supervisor’s recommendations come as part of an opinion paper – ‘On a common framework for the risk assessment and transparency for Institutions for Occupational Retirement Provision (IORPs)’ – to the European Commission, Council and Parliament, and are the outcome of almost three years of work on the solvency of IORPs, the most recent input having been a quantitative impact assessment (QIS) conducted last year.

EIOPA said the recommendations would strengthen the IORP Directive and “contribute to the sustainability of occupational pension promises and the protection of members and beneficiaries”.

Under its proposals, IORPs would have to conduct a standardised risk assessment to calculate the impact of common, pre-defined stress scenarios on a pension fund’s balance sheet, which would be “set up for the very purpose of the standardised risk assessment”.

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Under the targeted common framework balance sheet, assets and liabilities would have to be valued on a “market-consistent” basis and include all available security and benefit-adjustment mechanisms, such as sponsor support, pension protection schemes and benefit reductions.

“However,” EIOPA said, “at this point in time, [we do] not advise on harmonising capital or funding requirements.”

EIOPA said the term ‘standardised risk assessment’ has been used instead of ‘solvency capital requirement’ – and ‘common framework balance sheet’ instead of ‘holistic balance sheet’ (HBS) – “as these are more appropriate terms to use in the context of risk assessment and transparency”.

The HBS has been controversial in the European pensions industry, viewed with suspicion and opposed by many who fear the introduction of Europe-wide regulatory solvency requirements.

Under EIOPA’s latest proposals, occupational pension funds should publicly report the standardised balance sheet and the outcome of the risk assessment.

National supervisors should “be provided with sufficient powers to act in response to the conclusions of the standardised risk assessment”.

Special treatment should be available for smaller pension funds, according to EIOPA, such as exemptions, the use of simplified methods, and less frequent risk assessments.

EIOPA chairman Gabriel Bernardino said: “This opinion presents a major step forward towards realistic, risk-sensitive information on the financial situation of pension funds.

“Relevant transparent disclosure will trigger a dialogue on the long-term sustainability of occupational pension promises and encourage timely adjustments.

“As such, our recommendations contribute to the protection of pension scheme members and beneficiaries and to a fair distribution of shortfalls between generations”. 

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