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'Politically unacceptable' HBS should be replaced, says Towers Watson

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  • 'Politically unacceptable' HBS should be replaced, says Towers Watson

EUROPE - The European Commission should abandon proposals to value individual characteristics of pension funds as part of the proposed 'holistic balance sheet' (HBS), according to consultancy Towers Watson, which warned that the review of the IORP Directive could otherwise be derailed by being "politically unacceptable".

In an open letter by EMEA head of retirement solutions Mark Stewart to the commissioner for internal markets Michel Barnier, the consultancy instead proposed its own version of the HBS that, it argued, was "workable".

He said that proposals put forward by the European Insurance and Occupational Pensions Authority (EIOPA) for the HBS were "potentially useful", but argued that resistance over the plans could destabilise the Commission's entire decade-long reform package - titled Europe 2020 - as it hoped to place a unified value on differing employer covenants and pension protection schemes in place across member states.

"However," Stewart said, "placing a single value on the 'IORP characteristics' consistently across all the many different types of characteristics, sectors and jurisdictions will be difficult and potentially controversial.

"Towers Watson considers that a variant to the EIOPA HBS may offer a more effective, less controversial and easier (hence cheaper) approach.

"This variant is consistent with our view that what really matters in protecting the rights of IORP members is the IORP sponsor's business model and its capacity for future wealth generation, backed by strong governance, risk management and supervisory oversight."

Stewart said it was sufficient to calculate the "quantum of reliance" on issues such as covenant and protection schemes, which would be taken into account when examining any potential funding shortfalls.

"Any corrective action would then be decided by the IORP managers - and, where appropriate, the supervisory authorities giving due regard to all relevant circumstances, including the security mechanisms inherent within each member state's pension system and/or the IORP itself."

The consultancy also said its HBS variant benefitted from being simple enough to pass at the same time as Pillars II and III of the revised IORP Directive, amid concerns they could be introduced prior to Pillar I, covering scheme capital requirements.

Speaking in the upcoming July/August issue of IPE, the UK's National Association of Pension Funds' senior policy adviser James Walsh said pushing ahead with the latter two pillars was a proposal the organisation had "floated" in the wake of March's public hearing on the reforms.

"We pointed out that there was a good consensus around Pillars II and III and that we would be pleased if the Commission decided to press ahead with those two pillars, but leave the much more difficult area of Pillar 1 and pension schemes funding aside," he said.

The Towers Watson letter concluded: "Transparency of the overall security of the pension promise is paramount. The 'balancing item' approach at the core of the Towers Watson HBS variant achieves this without the controversial and expensive quantification process."

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