Developments in Pension Fund
Regulation and Long Term Investment
Barthold Kuipers
OECD/RiskLab/APG Workshop on Pension Fun...
Background risk-based regulation
for pension funds
• April 2011: European Commission’s CfA
o harmonised, risk-based pruden...
Holistic balance sheet
7 April 2014
• Market-
consistent
valuation basis
• All security and
benefit
adjustment
mechanisms
...
QIS on IORPs: overall impact
7 April 2014
• Excess of assets
over liabilities and
surplus over SCR
range from
substantial
...
QIS on IORPs: solvency capital
requirement (SCR)
7 April 2014 5
SCR, % liabilities SCR for market risk, % liabilities
Pens...
EIOPA’s further work on holistic
balance sheet
7 April 2014
EIOPA will conduct further work on holistic balance
sheet duri...
Background on EIOPA report on
long-term investments
• Commission initiative on long-term financing of
European economy
• S...
Private equity and SMEs
• Private equity/venture capital
o Analysis based on market prices shows no justification
for lowe...
SRI and infrastructure
• Social responsible investments (SRI)
o Literature is inconclusive about relative performance
- Re...
Annual default rates for
infrastructure
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
1 2 3 4 5 6 7 8 9 10
Margin...
Default rates for availability- based
infrastructure
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
1 2 3 4 5 6 7 ...
Securitisations: wide differences in
performance
Spreads versus the Euribor in Europe for maturities of three to five year...
Criteria for high-quality and other
securitisations
• Based on both past experience and economic
analysis
• Requirements t...
Proposed calibrations for
securitisations
Proposed risk charges for high quality:
Proposed risk charges for the remainder:...
Conclusions
• European risk-based prudential regime is work in
progress
• Supervisory framework underlying the holistic
ba...
Thank you
EIOPA
email: barthold.kuipers@eiopa.europa.eu
www.eiopa.europa.eu
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Developments in Pension Fund Regulation and Long Term Investment – Barthold Kuipers - OECD-Risklab-APG Workshop on pension fund regulation and long-term investment

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This presentation by Barthold Kuipers, EIOPA, was made at the OECD-Risklab-APG Workshop on pension fund regulation and long-term investment held in Amsterdam on 7 April 2014. Discussions focused on: long-term pension investment strategies under risk-based regulation; riskiness and procyclicality in pension asset allocation; and, regulatory challenges for long-term illiquid assets.

For more information please visit: http://www.oecd.org/daf/fin/private-pensions/OECD-APG-workshop-pension-fund-regulation-LTI.htm

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  • Based on approx. 160 observations
  • Based on approx. 160 observations
  • Developments in Pension Fund Regulation and Long Term Investment – Barthold Kuipers - OECD-Risklab-APG Workshop on pension fund regulation and long-term investment

    1. 1. Developments in Pension Fund Regulation and Long Term Investment Barthold Kuipers OECD/RiskLab/APG Workshop on Pension Fund Regulation and Long-term Investment Amsterdam, 7 April 2014
    2. 2. Background risk-based regulation for pension funds • April 2011: European Commission’s CfA o harmonised, risk-based prudential regime for IORPs • 15 February 2012: EIOPA’s final advice I. Quantitative requirements on valuation and solvency II.Qualitative requirements on governance and supervisory review III.Transparency requirement, i.e. information provision to members and beneficiaries • 4 July 2013: EIOPA Report on QIS on IORPs • 27 March 2014: IORP II proposal only pillar II&III 7 April 2014 2 Pension fund regulation
    3. 3. Holistic balance sheet 7 April 2014 • Market- consistent valuation basis • All security and benefit adjustment mechanisms included • Risk-based solvency capital requirement 3 Pension fund regulation
    4. 4. QIS on IORPs: overall impact 7 April 2014 • Excess of assets over liabilities and surplus over SCR range from substantial surpluses to large shortfalls 4 Pension fund regulation
    5. 5. QIS on IORPs: solvency capital requirement (SCR) 7 April 2014 5 SCR, % liabilities SCR for market risk, % liabilities Pension fund regulation
    6. 6. EIOPA’s further work on holistic balance sheet 7 April 2014 EIOPA will conduct further work on holistic balance sheet during 2014 in five areas: •Sponsor support •Supervisory responses •Discretionary decision-making processes •Benefit reduction mechanisms •Contract boundaries Consultation paper expected end-Q3 2014 EIOPA’s tested proposal to Commission end-2015 6 Pension fund regulation
    7. 7. Background on EIOPA report on long-term investments • Commission initiative on long-term financing of European economy • September 2012 - Commission request to EIOPA to re-examine SCR calibrations under Solvency II for long-term asset classes: o Infrastructure debt and equity financing incl. project bonds o SME debt and equity financing o SRI and social business debt and equity financing o Securitisation of the above mentioned without jeopardising prudential nature of regime • December 2013 - EIOPA report on long-term investments Long term investment 7 April 2014 7
    8. 8. Private equity and SMEs • Private equity/venture capital o Analysis based on market prices shows no justification for lower calibration o Use of Net Asset Values may lead to artificial smoothing of returns o No clear economic rational for lower volatility • Small and medium-sized enterprises (SMEs) o SMEs covers entities < 250 employees and < EUR 50 million in sales o Financed through bank credit o Loan default rates show that current treatment is quite favourable o No clear economic rational for lower volatility 7 April 2014 8 Long term investment
    9. 9. SRI and infrastructure • Social responsible investments (SRI) o Literature is inconclusive about relative performance - Reduced diversification increases risk - Good governance companies have lower risk o Various possibilities to define SRI - Narrow: reduction investable universe - Wide: overlap with conventional indices • Infrastructure project equity & debt o No data available for project equity o Default rates of project debt decrease over time - higher risk in the construction phase o Default rates availability-based comparable to BBB - information not public and small sample 7 April 2014 9 Long term investment
    10. 10. Annual default rates for infrastructure 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 1 2 3 4 5 6 7 8 9 10 Marginalannualdefaultrates Years World OECD Europe Moody'sA Moody'sBaa Moody'sBaa3 Moody'sBa1 7 April 2014 10 Long term investment
    11. 11. Default rates for availability- based infrastructure 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 1 2 3 4 5 6 7 8 9 10 Marginalannualdefaultrates Years World OECD Europe Moody'sA Moody'sBaa Moody'sBaa3 Moody'sBa1 7 April 2014 11 Long term investment
    12. 12. Securitisations: wide differences in performance Spreads versus the Euribor in Europe for maturities of three to five years (AAA tranches). Source: ECB 7 April 2014 12 Long term investment
    13. 13. Criteria for high-quality and other securitisations • Based on both past experience and economic analysis • Requirements to be met: o Unambiguous o Easy to apply o Separate well performing and poor performing securitisations • ECB eligibility criteria for securitisations used in refinancing operations as one source • Criteria “No self-certification” and “No credit impaired borrowers”: very effective in eliminating US subprime and UK non-conforming RMBS 7 April 2014 13 Long term investment
    14. 14. Proposed calibrations for securitisations Proposed risk charges for high quality: Proposed risk charges for the remainder: 7 April 2014 14 Long term investment
    15. 15. Conclusions • European risk-based prudential regime is work in progress • Supervisory framework underlying the holistic balance sheet not known • Solvency capital requirement only for risks borne by institution itself • “Guarantees” provided by IORPs to members and beneficiaries incompatible with “long-term investments” 7 April 2014 15
    16. 16. Thank you EIOPA email: barthold.kuipers@eiopa.europa.eu www.eiopa.europa.eu

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