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Towers Watson, Aon Hewitt urge EIOPA to drop market discount rate

EUROPE – Leading actuaries at Towers Watson and Aon Hewitt have together drawn up a paper recommending changes to the revised IORP Directive and future quantitative impact studies (QIS) conducted by the European Insurance and Occupational Pensions Authority (EIOPA).

Among their suggestions is to drop the market approach for determining the discount rate and to instead develop a discount rate “guided by the expected return on assets”, Alfred Gohdes of Towers Watson and Georg Thurnes of Aon Hewitt Germany noted in the joint paper shown exclusively to IPE.

The actuaries suggested using a rate “akin to the Level B discount rate” as set out in the QIS technical specifications – a discount rate based on the expected return of assets and the asset allocation of the IORP.

“This would, at least conceptually, permit a consistent approach to both sides of the balance sheet,” Gohdes and Thurnes noted.

The authors said they were in principle not opposed to a set of European rules governing the types of benefits paid by IORPs, as long as these could “sensibly and over a suitably long convergence period [be] applied in all jurisdictions across Europe”.
 
However, both actuaries were convinced that to develop such rules required a “significant amount of additional understanding of the legal environments by the EC and EIOPA”.

They noted that the “many issues arising from the quantification” of subjects such as sponsor support, pension protection schemes, the level of risk margin and the classification of differing benefit types “became very evident from the QIS” and needed “significant” further development.

Both added that they believed the level of risk margin was set “unacceptably high for most practical purposes”.

The actuaries further called on the European Commission to be more transparent in its aims and goals, as a lack of information on key proposals had left stakeholders “in the dark”.

The consultancies were most critical of the fact that the EC and EIOPA failed to mention in the over 600 pages of written material provided for the QIS that the holistic balance sheet (HBS) was not a balance sheet, as such, but a “tool to facilitate prudential supervision”, as EIOPA chairman Gabriel Bernadino explained in speeches toward the end of last year.

“If the HBS were a balance sheet in the traditional sense, the sponsoring employer(s) would probably have to recognise corresponding liabilities on their balance sheet where the IORP recognised corresponding assets,” the actuaries pointed out.

Gohdes and Thurnes even went as far as to say that this omission was
tantamount to “wilfully damaging occupational pensions”.

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