EIOPA should stop work on the holistic balance sheet (HBS) or any other type of common methodology as a harmonised solvency framework for occupational pension funds because they “do not work”, PensionsEurope has said.

The association made the comments in its position paper on the stress tests the European Insurance and Occupational Pensions Authority (EIOPA) carried out on occupational pension funds (IORPs) last year, with the results announced on 26 January.

The paper develops PensionsEurope’s initial reaction to the stress tests, when it urged for caution in interpreting them.

It reiterates this view and fleshes out doubts it raised about EIOPA’s use of a common methodology.

The stress tests measured the resilience to financial turbulence and increased life expectancy of defined benefit (DB)/hybrid and defined contribution (DC) schemes in 17 countries in the European Economic Area.

The impact of the shocks was assessed on two bases, with one founded on a “common methodology” developed by EIOPA, the other on the national balance sheet of the pension funds’ home countries.

PensionsEurope was unequivocal in its criticism of the common methodology, which it said was the HBS renamed.

The stress test results show the HBS “does not work”, said Janwillem Bouma, chair at PensionsEurope.

“EIOPA should not continue to work on the HBS model or any other similar ‘common methodology’ as a harmonised solvency framework,” he added.

HBS is equated by many in the European pensions industry with the controversial introduction of solvency requirements for pension funds.

These have been dropped from the remit of the revision of the IORP Directive currently underway, but EIOPA will still be giving advice on solvency and the use of HBS.

It plans to deliver this advice by the end of March, although PensionsEurope suggested EIOPA may be heading for a mistake.

“PensionsEurope is willing to explain its concerns in advance of EIOPA’s publishing the Quantitative Assessment report to help EIOPA avoid taking a wrong path,” said Bouma.

The HBS has many shortcomings, involving both fundamental and “severe” practical problems, according to the association.

The approach, it said, was “neither suitable nor useful”.

It welcomed the rejection in late January by the European Parliament’s ECON committee of the further development of IORP solvency models at EU level, which said quantitative capital requirements could “potentially decrease the willingness of employers to provide occupational pension schemes”.

PensionsEurope said it remained unclear how sponsor support should be taken into account.

Instead of the HBS, EIOPA should propose principles-based guidelines only, according to the association.

These could then be considered and adopted where appropriate by national authorities of the relevant countries.

EIOPA should “think instead about encouraging alternative risk-management tools”, it said.

It referred back to previous suggestions it made, such as an ALM analysis, that could serve similar goals as those EIOPA set for the common methodology but that would be less complex, cheaper and entail “less model uncertainty”.

Beyond the HBS

PensionsEurope also raised concerns about the stress tests that do not have to do with the HBS – about EIOPA’s conclusion that IORPs do not pose a systemic risk, for example.

Given this outcome, according to Matti Leppälä, chief executive at PensionsEurope, “future stress tests would best be used to highlight the risks to individuals’ retirement prospects”.

He added: “This would help to underpin the central message we all wish to get across – that more people should be saving more for their retirement.”

Overall, EIOPA should carry out any future stress tests only when there are “situations that justify the exercise”, according to the association.

The authority has said it will carry out further stress tests, with the next being in 2017 given a two-year cycle, but PensionsEurope said bi-annual stress tests “would be excessive”.

The association also raised the issue of the stress tests’ compatibility with the European Commission’s Capital Markets Union (CMU) project.

IORPs are “essential players in the realisation of the CMU”, it said, but some assumptions used in the stress tests might prevent their investing long term in sustainable real assets, “which seems counter” to the CMU’s aims.

An area of agreement was in relation to the need for more work to understand the potential impact on the real economy and financial markets from the occupational pensions sector’s sensitivity to adverse market developments.

It also welcomed EIOPA’s recognition of the heterogeneity of European IORPs and their respective financial assessment frameworks, adding that “a consequence of that heterogeneity is that funding requirements and funding ratios differ between countries”.

Topics