Pension fund CFO dismisses QIS as 'Solvency II with complexity'

GERMANY – The inclusion of sponsor covenants and pension protection schemes in the holistic balance sheet makes the solvency calculations suggested for the revised IORP Directive more complex but not necessarily fitter for occupational pension schemes, according to Stefan Nellshen, CFO at Bayer’s pension fund.

The currently running quantitative impact study (QIS) on the new solvency requirements will only have “restricted significance”, and its relevance will be “limited”, as the majority of occupational pension schemes in Germany – mainly the smaller ones – “cannot take part because of its complexity”, Nellshen warned.

Speaking at the annual conference for aba, the German association for second-pillar pension funds, Nellshen stressed the importance of a wide participation among aba’s members in order to assess the complexity properly.

Georg Thurnes, managing director at Aon Hewitt Germany, also pointed out that it was possible just to fill out the qualitative part of the QIS and agreed it was too complex to calculate.

Nellshen went on to argue that the revised IORP Directive was “based on a copy of Solvency II” and “completely unfit for occupational pension plans”.

He repeated criticism voiced by many members of the German and other pension industries that Solvency II’s “short-term approach” could distort occupational pension funds’ long-term investment horizons.

He also pointed out that these pension funds were financed jointly by employers and the capital market.

Regarding the inclusion of sponsor covenants in the holistic balance sheet, Nellshen provided calculations showing that smaller company pension plans might still have to face a “threefold increase in capital requirements”, if only because they do not have a major group to back them.

Nellshen said the problem of multi-employer pension funds had yet to be resolved, as they would have to calculate sponsor covenants for each of the companies paying into the pension scheme.

He recommended allowing sponsor support to be integrated as equity in the calculations, which would be “closer to reality”, as a sponsor provided additional safety beyond merely closing actuarial funding gaps.

Nellshen cited the risk-margin is another major problem for occupational pensions that should be removed from the IORP Directive.

He said the risk-margin was “not relevant” for the second pillar, as occupational pension schemes, unlike life insurance companies or other listed companies, did not have to create revenue on their equity.

“If I am calibrating the parameters for solvency calculations correctly, this should be enough and makes a buffer like the risk-margin – which does not have a clearly defined use – superfluous,” he said.

He also warned that the mark-to-market concept created “unnecessarily high” volatility in a pension funds that could lead to “wrong, short-term incentives in the company policy”.

Actuary Thurnes added that the German actuarial association DAV had translated and interpreted the QIS technical specifications and would offer a webinar to help pension plans calculate them.