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EIOPA challenged to decide fate of past accrual before HBS action

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  • Frankfurt, Germany

Pension funds will be unwilling to take part in a further holistic balance sheet (HBS) impact assessment until the European Insurance and Occupational Pensions Authority (EIOPA) decides how to treat existing deficits, the supervisor has been told.

The recently concluded HBS consultation said EIOPA would consider the possibility of “grandfathering”, so that any changes would only affect future defined benefit (DB) accrual.

In their responses, pension associations and consultancies argued that the matter would need to be resolved before the supervisor pushed ahead with a further quantitative impact study (QIS), but warned that any exemption would undermine the purpose of the HBS.

Aon Hewitt argued that its clients would be “unwilling to invest significant time, cost and resources” in a future QIS until the treatment of past accrual were decided, especially in light of the previous study assessing a shortfall of €450bn across IORPs in the European Economic Area (EEA).

“In the short term, EIOPA should advise the [European Commission] on how a long transition or exemption could work in practice,” the consultancy added.

“This would be supported by the EEA pensions industry, and then there is more likely to be greater engagement in any subsequent QIS work.”

EIOPA’s occupational pensions stakeholder group (OPSG) agreed that there would either be a need for prolonged transitional periods, or potentially grandfathering, or the introduction of new pension contracts, depending on the system.

“Very long transitional periods are not recommended but, in some cases, may be absolutely necessary under some supervisory frameworks,” the group said.

“Therefore, the choice of the supervisory framework should be evaluated also compared with the duration of transitional periods.”

For its part, PensionsEurope said it would welcome both grandfathering and long transitional periods for the introduction of the HBS, while the UK’s National Association of Pension Funds (NAPF) supported grandfathering but warned that it could threaten the very purpose of the HBS.

It noted that the approach would leave out of its scope funds no longer open to accrual – the large majority of UK DB funds – which were never designed to deal with an HBS.

“This approach would, of course, reduce the effectiveness of the HBS as a means of protecting the full range of members’ benefits and, therefore, call into question the value of the whole exercise,” it said.

“But – as explained in this response – the NAPF is confident members’ benefits in the UK already enjoy robust protection.”

Respondents also warned that the HBS was being undermined by the flexibility being proposed by EIOPA in the wake of fierce industry resistance.

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