The European Private Equity and Venture Capital Association (EVCA), along with seven other trade bodies, has criticised revisions to the upcoming EU Pension Fund Directive. They fear the current methodology would impose a Solvency II-like framework for pension supervision.
The other organisations that have voiced concern are: the European Association of Paritarian Institutions, European Centre of Employers and Enterprises providing Public services, BUSINESSEUROPE, European Fund and Asset Management Association, European Federation for Retirement Provision, European Trade Union Confederation and the European Association of Craft, Small and Medium Sized Enterprises.
“We keep hearing that there will not be a cut and paste Solvency II framework to IORPs [occupationl pension plans], however all the steps taken so far point in the opposite direction,” Valeria Ronzitti, general secretary of the European Centre of Employers and Enterprises providing Public services, said in a statement.
In its current form Solvency II, which may be delayed due to ongoing discussions of its long-term impact, requires insurers to hold varying levels of capital based on the riskiness of an asset. For private equity holdings, insurers are required to set aside €49 for every €100 invested.
The Pension Fund Directive is currently being revised with the European Insurance and Occupational Pensions Authority (EIOPA).
As part of this process EIOPA are carrying out a Quantitative Impact Study to assess the financial impact of different sets of options for the valuation of a “Holistic Balance Sheet” and the calculation of capital requirements.
The use of a “Holistic Balance Sheet”, which aims to quantify whether or not a pension plan provides a specified level of security, is central to EVCA’s fear.
This method, although different to Solvency II, would still provide a risk weighting mechanism through calculating the capital necessary to provide the required security and then assigning a value to everything that contributes to that security.
Using a risk weighted mechanism like Solvency II could hamper long-term investment from pension funds, warned Dörte Höppner, secretary-general of EVCA, in a statement.
“Applying the market consistent approach of Solvency II to IORPs [pension plans] could create a perverse incentive for pension schemes to attempt to meet long-term liabilities with short-term investments. This will be further exacerbated by erroneous risk weights for long-term investments such as infrastructure, private equity and venture capital,” she added.