The proposed holistic balance sheet (HBS) will no longer look to impose a ‘one-size-fits-all’ approach to sponsor valuation, with the European Insurance and Occupational Pensions Authority (EIOPA) now considering a principles-based approach.
In its consultation on the HBS, which included six potential balance-sheet models, the supervisor said it would look at the feasibility of a principles-based approach that took advantage of existing protection mechanisms.
The paper also looked at how the HBS would need to assess purely discretionary benefits, guaranteed benefits and those with both guaranteed and discretionary elements.
The principles-based approach put forward by EIOPA would examine the default risk of a sponsor, the strength of any company (differentiating between commercial and not-for-profit sponsors) and how sponsor support should be evaluated in cases where a protection mechanism, such as the Pensions-Sicherungs-Verein (PSV) of Germany or the UK Pension Protection Fund (PPF), was in place.
EIOPA said that if a protection mechanism were used as part of the HBS as a “balancing item”, then the supervisor would need to be assured of the protection scheme’s security and ability to raise funds.
Including protection mechanisms as a balancing item would simplify any HBS proposals, EIOPA noted, referencing particularly the advantages for multi-employer IORPs.
However, it stressed that reliance on a protection mechanism would require minimum funding requirements to be in place.
The supervisor said it accepted that a principles-based approach would be the superior model.
“The standard methods developed by EIOPA,” it said, “are unlikely to be suitable for all types of sponsor support arrangements, particularly with complex interactions between security and benefit-adjustment mechanisms or embedded options.”
The supervisor’s principles-based approach comes after warnings from the industry that the prior sponsor-assessment proposals could “mask” risk and lead to inconsistent and arbitrary valuations.
EIOPA added that only limitless benefit reductions would be able to balance the HBS, rather than any situations where there were caps imposed on the amount of cuts.
“By their nature, benefit reduction mechanisms will be the last mechanisms taken into account,” the consultation said.
“Only where all mechanisms meant to strengthen the promise are fully taken into account will benefit reductions be considered.”
It divided benefit reductions into three categories: Those agreed by contract between beneficiaries and the provider; those allowed as a last resort, as permitted by national law; and those imposed on savers in the event of sponsor insolvency.
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