mast image

Special Report

Impact investing

Sections

Holistic balance sheet QIS 'too focused on capital requirements'

Related images

  • Holistic balance sheet QIS 'too focused on capital requirements'

EUROPE – PensionsEurope has urged the European Commission to shift the revised IORP Directive's focus away from capital requirements under the first pillar towards pillars II and III, which aim to improve governance and transparency at occupational schemes.

In a position paper on the first quantitative impact study (QIS), the European Insurance and Occupational Pensions Authority (EIOPA) launched in October last year, PensionsEurope argued that the exercise posed the wrong questions.

According to the association, EIOPA in the first QIS exercise should have asked whether the holistic balance sheet (HBS) approach should be seen as a supervisory tool and, if so, whether it would work.

PensionsEurope said the HBS would fail to work as a supervisory tool since it provided neither insight into the quality of the pension deal for an individual participant nor a useful understanding of a pension fund's solvency position.

Additionally, the Brussels-based association argued that, in order to value the HBS, IORPs have to make "many assumptions".

This, in turn, could lead to "completely different" outcomes, according to PensionsEurope.

"First of all," the association said, "the dependency on the different assumptions can be seen in the difference between the 'upper bound' and 'lower bound' scenarios.

"The difference in the holistic funding ratio between the upper bound and the lower bound could be easily up to 50%."

PensionsEurope also pointed out that the results of the first QIS were "very dependent" on the current economic situation.

"Due to the interest rates, which are held artificially low, partially as a result of monetary interventions, a lot of European IORPs will be confronted with a large increase in the value of the liabilities," it said.

With regards to sponsor support, PensionsEurope said it was "hard" to value since many European employees participate in multi-employer pension schemes, and given the fact that, in some cases, two or more IORPs are sponsored, ultimately, by the same entity or, at least, with the support of the same parent company.

As a result, Matti Leppälä, PensionsEurope chief executive, argued that the HBS could only address whether the financial policy of the IORP was sustainable in the long run.

"Alternative approaches such as ALM studies or stress tests should also be considered to achieve adequate regulation of IORPs across Europe," he said.

Leppälä stressed that, even if the Commission proceeded with the HBS proposal, there would still be "major" shortcomings.
 
PensionsEurope also reiterated concerns over the fact the first QIS addresses the valuation of the HBS and solvency capital requirements, but not the impact on benefits, contributions, recovery plans and investment decisions.

Joanne Segars, chair of the association, said the QIS failed to address the most important question – how the HBS approach will be used in practice.

"As a result," she said, "the impact on contributions, employers, employees and the entire economy cannot be measured at this time.

"However, we do realise the importance of appropriate pension supervision across Europe, especially with respect to minimum standards on governance, risk management and transparency.

"Therefore, we would advise the European Commission to present proposals for a revised IORP Directive that focus on the pillar II and pillar III elements. These proposals should then be thoroughly tested."

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-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

Begin Your Search Here
<