(February 11, 2013) — An approach proposed by European regulators to harmonise pension providers in the region has been dismissed as “not workable” by the continent’s representative organisation.
The Holistic Balance Sheet, which takes into account the different characteristics of Institutions for Occupational Retirement Provision (IORP), is the main bone of contention for PensionsEurope (previously the European Federation of Retirement Provision), a white paper on the issue published today has shown.
PensionsEurope said a Quantitative Impact Survey (QIS) held in the autumn on the impact of a revised IORP Directive – which proposes the implementation of the Holistic Balance Sheet – highlighted a number of issues.
“It is very sensitive to subjective assumptions,” Matti Leppälä, secretary general and CEO of PensionsEurope said, “and the interaction between elements of the holistic balance sheet and the Solvency Capital Requirements leads to inconsistency.”
Leppälä said the approach could only try to address whether the financial policy of the IORP was sustainable in the long-run so other approaches such as asset/liability modelling and stress-tests should be considered to achieve adequate regulation of IORPs across the region.
The holistic balance sheet approach would assess a defined benefit fund’s financial assets, contingent assets and the sponsor’s covenant. Assessments of liabilities would include best estimates, a risk buffer evaluation, and potential surplus presumptions where assets exceeded liabilities.
“Workplace pensions are based on social and cultural tradition and strongly linked to statutory public (first pillar) pension provision, which differs between Member States,” the white paper stated. “IORPs cannot be measured in the same way as banks and insurance companies, which have no comparative system to that of first pillar pension provision and little social function.”
PensionsEurope called for another QIS that would delve further into an appropriate measure of the holistic balance sheet, adding that the IORP directive in its current form could have major unintended consequences.
“This QIS does not address the most important question: how will the proposed approach be used in practice?” said Joanne Segars, chair of PensionsEurope. “As a result, the impact on contributions, employers, employee and the entire economy cannot be measured at this time.”
The organisation said it was concerned that applying regulation based on Solvency II to IORPs would have negative consequences not just on pension providers and members.
“If IORPs face higher costs, this automatically leads to higher labour costs and that will make the European economy less competitive,” the white paper stated. “In addition, as more funds would be tied up in IORPs, less capital will be available for sponsoring employers to invest within their business, which will have a negative impact on employment.”
PensionsEurope also said it was worried about the impact on asset allocation becoming more short-termist and a solvency framework similar to that of insurance companies and banks increasing pro-cyclicality.
To read the full white paper, click here.
For an in-depth interview with Joanne Segars, see the January/February edition of aiCIO published at the end of this month.