European private equity’s mouthpiece, the European Private Equity and Venture Capital Association (EVCA), has called for changes to the EU’s draft Institutions for Occupational Retirement Provision (IORP) directive.
In a response to a consultation paper, written by the European Insurance and Occupational Pensions Authority’s (EIOPA), the EVCA said that “the potential application of the Solvency II – style requirements to IORPS might be inappropriate and disproportionate for a long-term asset class like private equity.”
Solvency II requires insurers to hold varying levels of capital based on the riskiness of an asset. For private equity holdings, insurers are required to set aside €39 for every €100 invested under a default risk model. The industry feared that this would make private equity investments too expensive for pension funds.
The EVCA recommends that any proposals should reflect the specific characteristics of private equity as a long-term asset class. In this respect, an approach that uses market-based valuation is inappropriate for private equity.
“Our concern is that without a fair approach to determining the value of private equity assets, pension funds may be deterred from investing in the asset class to the detriment of future pensioners and the real economy,” said in a statement Michael Collins, EVCA public affairs director.
EVCA’s fear is centered on the “Holistic Balance Sheet” which is being considered as a way to quantify whether or not a pension plan provides a specified level of security. Although different to Solvency II, the Holistic Balance Sheet method would still provide a risk weighting mechanism through calculating the capital necessary to provide the required security and then assigning a value to everything that contributes to that security.