developments in pension fund regulation and long term investment – barthold kuipers -...
DESCRIPTION
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.htmTRANSCRIPT
Developments in Pension Fund Regulation and Long Term Investment
Barthold KuipersOECD/RiskLab/APG Workshop on Pension Fund Regulation and Long-term InvestmentAmsterdam, 7 April 2014
Background risk-based regulation for pension funds
• April 2011: European Commission’s CfAo 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
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
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
QIS on IORPs: solvency capital requirement (SCR)
7 April 2014 5
SCR, % liabilities SCR for market risk, % liabilities
Pension fund regulation
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
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
Private equity and SMEs
• Private equity/venture capital o Analysis based on market prices shows no justification for
lower calibrationo Use of Net Asset Values may lead to artificial smoothing of
returnso 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 credito Loan default rates show that current treatment is quite
favourableo No clear economic rational for lower volatility
7 April 2014 8
Long term investment
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 & debto No data available for project equityo 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
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
Mar
ginal
annu
al de
faul
t rat
es
Years
World OECD Europe Moody's A
Moody's Baa Moody's Baa3 Moody's Ba1
7 April 2014 10
Long term investment
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
Margi
nal a
nnua
l defa
ult ra
tes
Years
World OECD Europe Moody's A
Moody's Baa Moody's Baa3 Moody's Ba1
7 April 2014 11
Long term investment
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
Criteria for high-quality and other securitisations
• Based on both past experience and economic analysis
• Requirements to be met:o Unambiguouso 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
Proposed calibrations for securitisations
Proposed risk charges for high quality:
Proposed risk charges for the remainder:
7 April 2014 14
Long term investment
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
