The European Commission has been urged to dramatically reconsider the approach it plans to use to measure all aspects of a pension scheme's financial situation as part of an overhaul of European pensions legislation.
In a position paper published today, PensionsEurope warned that the holistic balance sheet would not be workable as a tool for supervising pension schemes under the planned revision of the Institutions for Occupational Retirement Provision Directive.
The body, which represents 22 pension fund organisations across Europe, also highlighted 'major shortcomings' over using the approach to measure the long-term sustainability of pension schemes.
A quantitative impact study was launched in October aimed at gauging the financial impact of various options for valuing a pension schemes' holistic balance sheet, but PensionsEurope claimed the methodology outlined in the study was 'unworkable' as a supervisory tool.
'The holistic balance sheet approach neither provides insight into the quality of the pension deal for an individual participant nor a useful understanding of the solvency position of a pension fund: it only gives a snapshot view, under certain assumptions, and tries to address whether the financial position of the fund is sustainable in the long run,' it explained.
It also warned that in order to value their holistic balance sheets schemes would have to make 'many assumptions'.
'Changing these assumptions could lead to completely different, but legitimate, results,' the paper explained 'The impact of a small change in the assumptions can have a large impact on the outcome, because the sensitivity to some assumptions is high.'
Matti Leppälä, PensionsEurope secretary-general and chief executive, called for the use of alternative approaches, such as 'stress-tests', to achieve adequate Europe-wide regulation of pension schemes.
He added: 'Even if the European Commission proceeded with the proposal of a holistic balance sheet only in order to address whether the financial policy of the IORP is sustainable in the long run, there are still some major shortcomings.
'PensionsEurope has strong doubts about the quality and reliability of the current valuations within the holistic balance sheet. More quantitative impact studies will be necessary in order to come up with an appropriate valuation of a holistic balance sheet.'
Joanne Segars, chair of PensionsEurope, said that while more work was undertaken on the quantitative requirements of the new legislation, the commission should press ahead with other aspects of its proposals.
'We we do realise the importance of appropriate pension supervision across Europe, especially with respect to minimum standards on governance, risk management and transparency.
'Therefore, we would advise the European Commission to present proposals for a revised IORP Directive that focus on the Pillar II (qualitative requirements) and Pillar III (disclosure) elements. These proposals should then be thoroughly tested.'