04 July 2013

EIOPA - Discussion Paper on sponsor support technical specifications

This Discussion Paper says that the value of sponsor support depends on the timing of sponsor support payments, but the assumed payment period (i.e. duration of liabilities) is selected in an arbitrary way. Deadline for comments: 31 October 2013.

The QIS exercise was based on the technical specifications, as set out in the European Commission document published on 8 October 2012. This document was largely a reproduction of the draft technical specifications dated 2 October 2012 developed by EIOPA. As part of the preparation of this draft, EIOPA conducted a public consultation between 15 June and 31 July 2012 on the draft technical specifications. Stakeholders raised a number of issues with the technical specifications during the public consultation that could not be resolved before the start of the QIS exercise. The QIS outcomes largely confirm the issues identified last year, but also show that some additional elements of the technical specifications are in need of further attention.

One of the most significant aspects of the QIS results is the figure for sponsor support. As noted by stakeholders and IORPs in both the public consultation and during the QIS itself, the methodology for valuing sponsor support is subject to considerable practical difficulties. In particular, the maximum amount of sponsor support and the sponsor default probability are difficult to implement for IORPs. As the sponsor support values are highly sensitive to these inputs, EIOPA already stressed last year that further work on the technical specifications "will include revised proposals for, and public consultation on, an improved methodology for the calculation of sponsor support".

This discussion paper sets out EIOPA's preliminary thinking on how the general valuation principles for sponsor support in the QIS technical specifications might be improved and presents an alternative, simplified approach for calculating sponsor support. The contents of this paper should be considered a work in progress to collect comments and views from stakeholders. EIOPA intends to carry out further qualitative and quantitative analysis on the proposed simplification and more general methods to assess the impacts on QIS results, to consider the advantages and disadvantages of various approaches, and to gain knowledge about the conditions of applicability and reliability of each approach. This paper is not meant to rule out the use of any simplifications in relation to sponsor support or other issues covered by the technical specifications for the QIS.

The European Commission has announced that its forthcoming legislative proposal for a revised IORP Directive will not cover solvency rules for IORPs and that further technical work in this area is necessary. EIOPA will – in consultation with the Commission – set out a programme of work to better assess and compare IORP solvency, and to contribute to future decisions regarding European initiatives regarding solvency of pension funds. The analysis of sponsor support put forward in this discussion paper will be part of that programme of further technical work.

It should be remembered that commonalities and interdependencies exist between the sponsor support issues and the future work on other items of the holistic balance sheet. The valuation of discretionary benefits is – for instance – linked to the valuation of sponsor support that is subject to a discretionary decision-making process; the valuation of ex post benefit reductions, if considered, is related to priority orders of security and benefit adjustment mechanisms. The discussion paper does not take into account any modelling for supervisory responses, i.e., among other issues, how supervisors should respond to shortfalls under the holistic balance approach. As a result, more calibration would be needed if proposed approaches for sponsor support were to be used or adapted for a specific supervisory framework.

The deadline for comments is 31 October 2013.

Full paper

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