PensionsEurope has warned that the holistic balance sheet approach is not a workable tool for Institutions for Occupational Retirement Provision (IORP) supervision, and said that alternatives should be considered.

In a position paper on the Quantitative Impact Study (QIS) on IORPs, PensionsEurope said that it does not believe quantitative capital requirements can be harmonised across Europe in an appropriate way due to different social and cultural traditions and the way member states operate their statutory public pension provision.

The Association urged the European Commission not to develop a proposal for a revised IORP Directive where quantitative requirements are based on the results of this QIS.

Furthermore PensionsEurope said that the QIS, which was launched in October last year to investigate the possible impact of a revised IORP Directive on pension funds, has failed to address how the proposed approach would be used in practice.

"The methodology of a holistic balance sheet will not be workable as a supervisory tool. It is very sensitive to subjective assumptions, and the interaction between elements of the holistic balance sheet and the solvency capital requirements leads to inconsistency," said Matti Leppala, PensionsEurope secretary-general and CEO.

He argued that alternative approaches such as ALM studies or stress-tests, should also be considered to achieve adequate regulation of IORPs across Europe as the holistic balance sheet approach could only try to address whether the financial policy of the IORP is sustainable in the long-run.

Even if the European Commission proceeded with the proposal to address whether the financial policy of the IORP is sustainable in the long-run, Leppala said that "there are still some major shortcomings".

"PensionsEurope has strong doubts about the quality and reliability of the current valuations within the holistic balance sheet. More QISs will be necessary in order to come up with an appropriate valuation of a holistic balance sheet," said Leppala.

The holistic balance sheet is the European Insurance and Occupational Pensions Authority's (EIOPA) recommended mechanism to try to adopt a uniform supervisory regime for insurance companies and IORPs.

However, PensionsEurope said that many specific characteristics of IORPs are not taken into account in the holistic balance sheet approach.

Joanne Segars, PensionsEurope chair, said that the European Commission should not present a proposal for quantitative requirements based on the QIS results as it does not address the fundamental question of how the proposed approach will be used in practice.

She added: "However, we do realise the importance of appropriate pension supervision across Europe, especially with respect to minimum standards on governance, risk management and transparency.

"Therefore, we would advise the European Commission to present proposals for a revised IORP Directive that focus on the pillar II (qualitative requirements) and pillar III (disclosure) elements. These proposals should then be thoroughly tested. This QIS shows that more time is needed for pillar I (quantitative requirements) issues."

First published 11.02.2013

monique_simpson@wilmington.co.uk