AEIP - The European Association of Paritarian Institutions of Social Protection
AEIP welcomes the consultation launched by the three ESAs (EIOPA, ESMA and EBA) on the mechanistic references to credit ratings in the EAS’s guidelines and recommendations (JC-CP-2013-02).
AEIP represents the social protection institutions jointly established and run by the Social Partners. Its Members cover a number of social protection branches, such as pensions, healthcare, long-term care, health & safety at work and unemployment benefits.
Within the pension field, paritarian institutions are involved in both the managing of the first pillar and of the second pillar pensions, in accordance with the different European pension systems. AEIP represents pension schemes that are managed on pay-as-you-go (PAYG), mixed and funded basis, as well as defined contribution (DC), defined benefit (DB), and hybrid schemes. Its members fall either under the IORP directive (2003/41/EC), Solvency II (2009/138/EC) or Regulation 883/04 on the coordination of social security systems.
Today, AEIP has 26 members (mostly occupational pension funds - IORPs) in 18 European countries, and it covers, through its members, about 75 million European citizens and € 1.3 trillion in assets.
Answer to specific questions
Question 1: Do you agree with the definition of sole or mechanistic reliance on ratings provided in this document?
AEIP agrees with the proposal of definition of sole or mechanistic reliance to credit ratings as proposed by the three ESAs. Indeed, the definition seems to be in line with the wording of the CRA Regulation (462/2013) and provides for the right guidance in the drafting and implementation of prudential guidelines.
AEIP asserts that credit ratings are neither “good” or “bad” indicators per se. Rather, they can be useful as additional information for an investment decision or a prudential framework, but they must not constitute the founding element of the mechanistic rule. Providing for mechanistic references to credit ratings might create homogenous behaviour among the investors, triggering the risk of pro-cyclicality.
As an example, AEIP would like to raise the issue of the credit rating in the Holistic Balance Sheet (HBS). The HBS tool has been designed by EIOPA as a possible way for IORPs to value their steering mechanisms and the pension protection mechanisms available in their respective countries.
The HBS, as originally conceived in the EIOPA’s response to the EC Call for Advice on the review of the IORP Directive (Autumn 2011), as well as the HBS methodology tested in Autumn 2012 with the first IORP II Quantitative Impact Study (QIS), did contain mechanistic references to credit rating. Such ratings were necessary in order to calculate the sponsor support value. However, IORPs backed by companies with no rating available (such SMEs) and multiemployer and industry-wide schemes were penalised by the HBS methodology used in this first QIS.
AEIP finally welcomes that EIOPA has launched a consultation on a simplified methodology for calculating the sponsor support of an IORP. In this paper, EIOPA tries to find a solution for valuing sponsor support when no rating is available. However, it should be noted that the proposed methodology still leaves room for further research and analysis, as it is still linked to credit-rating, reflecting the illiquidity rather than the solvency risk of the sponsor.