Not enough time has been given by the European Insurance and Occupational Pensions Authority (EIOPA) to consider the amendments needed to its approach to implementing Solvency II, to make it fit for the purpose of the IORP review, say Mercer.
The comments are made by the consultancy following recent publication of EIOPA’s draft technical specifications for the Quantitative Impact Study (QIS) that will be run over the next few months, to identify the cost of some of its proposals. The QIS will be a ‘test run’, largely carried out by the Pensions Regulator in the UK, but still involving input from some schemes and industry specialists. It will attempt to assess the financial consequences of certain approaches and will influence EIOPA’s final advice on how the IORP Directive should be revised. The revisions to the IORP Directive are aimed at improving the efficiency and supervision of occupational pension provision across the EU. EIOPA has said that its approach to implementing the financial aspects of the Solvency II type prudential regime will be conditional on the findings of the QIS.
“The QIS will only consider a balance sheet calculation, ignoring what is most fundamental to IORPs and their sponsors, which is how liabilities are financed,” said Dr Deborah Cooper, Head of Mercer’s Regulatory Group. “It also ignores the importance of IORPS to capital markets. By applying a similar regulatory regime, with similar financial and investment incentives, to the regime that applies to insurance companies, it focuses risk management towards a small area within the range of possible financial solutions, distorting market behaviour and creating greater volatility. It is not fit for purpose.”
Mercer also believes that the approach to sponsor covenant is superficial and ignores differences between legal and corporate structures by attempting to impose a one-size-fits-all solution.
According to EIOPA, the QIS will only assess the financial impact on schemes of valuing assets and liabilities on the holistic balance sheet and introducing a solvency capital requirement under the various policy options in EIOPA's advice. EIOPA said the results would feed into the commission's impact assessment of all costs and benefits accompanying its legislative proposal.
“Because the approach has been picked off an insurance market shelf, the proposed model is disproportionate in some areas, and ignores differences between the way insurance companies and IORPs are financed,” concluded Dr Cooper. “Because of this, the information produced will be incomplete and is unlikely to usefully inform exactly what the impact of the proposals could be.”
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