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

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. 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. 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. 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. QIS on IORPs: solvency capital
requirement (SCR)
7 April 2014 5
SCR, % liabilities SCR for market risk, % liabilities
Pension fund regulation

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. 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. 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. 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. 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. 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. 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. 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. Proposed calibrations for
securitisations
Proposed risk charges for high quality:
Proposed risk charges for the remainder:
7 April 2014 14
Long term investment

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. Thank you
EIOPA
email: barthold.kuipers@eiopa.europa.eu
www.eiopa.europa.eu