The very purpose of the controversial holistic balance sheet (HBS) has been undermined by the flexibilities proposed by the European Insurance and Occupational Pensions Authority (EIOPA), respondents to its latest consultation have said.

The consultation, which closed yesterday, posed more than 100 questions to the European pensions industry after proposing six different models to harmonise defined benefit funding across the European Union.

In damning responses, pension fund representative groups across Europe, as well as consultancies, criticised the project and told EIOPA its proposals undermined itself.

The UK National Association of Pension Funds (NAPF), Dutch Pensions Federation, the German pension fund association (aba) and PensionsEurope all categorically rejected the HBS project.

The NAPF said that, while it shared EIOPA’s ultimate goal – the financial security of IORPs – it argued that the HBS would fail to achieve this.

It welcomed the additional flexibility granted to national supervisors in the latest HBS proposal but said this undermined the purpose of the project.

“The whole project was originally intended to allow greater comparability of pension schemes through a more harmonised regulatory system,” it said.

“If regulation is to be determined at national level, then there can be no justification for an EU-wide HBS system.”

For its part, the aba said EIOPA faced a dilemma in introducing the HBS, with the supervisor failing to present a concept that was “to any degree satisfactory”.

“If it is sound, it isn’t practical, and if it is workable, its results are questionable,” the German industry group said.

The European Association of Paritarian Institutions (AEIP) argued that the first quantitative impact study from 2012 had shown the “severe practical problems” EIOPA would face in translating its ambition for the HBS into a feasible tool, due to the absence of comparable market data.

“The complexity of the methods to use makes the HBS very sensitive, possibly too sensitive, for model and parameter assumptions, which can result in the valuation of HBS to change by tens of percentage points depending on the assumptions used,” it said.

Respondents were also concerned about the economic impact of the proposals, with the risk sponsors will be forced to increase contributions highlighted in a number of submissions.

The NAPF cited a warning from the European Central Bank that an HBS-based system could result in pension funds moving more towards low-risk bonds, thus undermining investment in growth assets.

A shift in asset allocation – towards supposedly risk-free fixed income and away from long-term assets such as infrastructure – was one of the unintended consequences PensionsEurope identified as a risk of introducing solvency capital requirements (SCR).

It said the initiative would run counter to recent European Commission initiatives to attract long-term capital, such as the Capital Markets Union, and would have both a micro and macro-economic impact.

EIOPA’s six proposals each would have imposed either SCR, a minimum funding level, or acted as a risk-management tool.

The Dutch Pensions Federation said it highly doubted whether the HBS could be developed into a prudential supervision tool.

“It should neither be used for capital requirements nor for transparency purposes in the relationship with members,” it said.

“It could possibly have some limited value as a risk-management tool. However, there are less complex methods available that are less costly and more informative.”

A compulsory risk-evaluation tool for pensions is currently being discussed in the revised IORP Directive to be debated in the European Parliament.

The NAPF supported the Dutch idea but said there would be no need for both the HBS and the newly suggested risk-evaluation reports.

“The NAPF’s view is that the risk-evaluation exercise, which is purely qualitative, is likely to be the more useful of the two innovations,” it said.

PensionsEurope, meanwhile, said it doubted the benefits of the HBS would outweigh the costs of its introduction. 

“PensionsEurope regrets that EIOPA does not consider using less complex and less costly risk-management instruments such as ALM studies, stress tests, continuity analysis,” it said.

In an interview with IPE, chairman of EIOPA, Gabriel Bernardino, said the HBS aimed to “enhance sustainability, provide stronger governance and provide full transparency”, and promised to return with a proposal that made sense for all parties.

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