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Pension funds at 'significant' risk from holistic balance sheet complexity

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  • Pension funds at 'significant' risk from holistic balance sheet complexity

EUROPE – High levels of complexity around the holistic balance sheet (HBS) approach in the revised IORP Directive, and member states' varying assumptions in testing the new supervisory tool, could lead to "significant" risks, the Dutch Pensions Federation has warned.

Releasing its position paper on the first quantitative impact study (QIS) for the revised IORP Directive, the association argued that the differing approaches taken by individual member states to calculate the components of the HBS could lead to different valuation outcomes and prudential conclusions.

According to the association, the first QIS exercise conducted by the European Insurance and Occupational Pensions Authority (EIOPA) highlighted that a number of components within the HBS – such as the "strong" dependence on credit ratings and the fact some pension funds use deterministic calculations, as opposed to stochastic valuations – could increase risk for occupational pensions.  

Additionally, it stressed that the interaction between elements of solvency capital requirements (SCR) and the HBS could lead to "inconsistencies".

"An example is the inconsistency resulting from the proposal that pension funds should include conditional indexation in their liabilities," the response said.

"Such inclusion may result in a need to cut back accrued pension benefits, in particular when the pension fund will be confronted with a funding deficit as a result of increased liabilities."

The organisation further stressed that such a scenario would be "undesirable and counterintuitive", as it would lead to a decrease in pension rights over the short term – in order to enable pension schemes to grant additional pension rights over the long term.

The submission questioned the feasibility of implementing an HBS within the revised IORP Directive as a supervisory tool.

Even if these issues were resolved and the HBS approach harmonised at the European level, the HBS tool would not necessarily be seen as an "optimal" supervisory framework, the federation said.

In the Netherlands, for instance, the association argued that the HBS approach would fail to improve the current FTK supervisory framework.  

"The FTK is less complex and results in a clear understanding of the financial position of a Dutch pension fund," it said.

This first QIS exercise was conducted by nine large pension funds in the Netherlands – including sector-wide multi-employer pension funds and company pension funds – while the exercise was supervised by De Nederlandsche Bank (DNB), the country's regulator.

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