“But, for us, it is not a choice between the two extremes. The discount rate should reflect the nature of the pension deal depending on guarantees, sponsor support, etc. The IORP is just executing this underlying deal.”He noted that, for a fully guaranteed pension deal, the risk-free rate could be applied, and for a pure (collective) DC arrangement, the rate could be based on expected returns.“However, most pension deals in Europe are somewhere in between these two models,” he said.If EIOPA forces all IORPs to use the risk-free rate, “it is ignoring the specifics and conditions of a pensions deal and valuing them as though they were fully guaranteed”, Valkenburg said.He said this happened in some countries with the first quantitative impact study (QIS), where a risk-free rate was applied.“The results exaggerated the funding deficits in some IORPs, but the truth is somewhere between national valuations and EIOPA’s approach,” Valkenburg said.He stressed the importance of getting a “true picture” of a pension arrangement’s liabilities and for plan members, as well as other stakeholders, to understand the implications of conditions attached to the deal.“Both DB and DC risks are currently often not fully understood and not communicated to members sufficiently,” he said.As an example, Valkenburg cites the UK, where pensions are guaranteed, but, in the event of insolvency of the sponsor, they are transferred to the Pension Protection Fund and cut by 10%.“Do members really know about this risk?” he asked.“We are not saying that any kind of deal is good or bad – we just need to get clarity for everyone involved so they have the basis to take action if necessary.”This “taking action” could even be in the form of lawsuits for breach of promise, like some are currently doing in the Netherlands with insurance companies over payments, Valkenburg said.But he stressed that “this is where pensions are different from insurance deals, as the first are an agreement between social partners” and can also be settled within that framework.“This is not only about this generation but also about the next ones, and we are talking about billions of euros worth in promises, most of which still have to be earned,” he said. “And if a slight increase in the retirement age can cause social unrest in France, then this could be worse.“We call for a process starting with clarity, leading to comprehension and from there to conciliation rather than going to court.”To achieve clarity on valuations, the AAE is proposing parameters be set on a national or European basis for ALM studies on liabilities by an independent committee “to prevent biased or too optimistic parameters being applied”.Valkenburg said: “An ALM allows you to make projections into the future development of members and assets of a fund. The HBS approach only shows you the situation at a certain point in time missing the wider point of how a fund can develop in the future.”In an earlier statement on EIOPA’s new IORP stress tests and quantitative assessment, the actuary said that, while HBS was “interesting”, it was “not ready to be used”.“When we take a longer view on pension deals – for example, with an ALM based on reasonable parameters – we will see that most pension deals are not sufficiently financed,” Valkenburg said. However, he pointed out that stakeholders are “not too keen on full disclosure”, adding that “the pain will not go away by just waiting”.And while he thinks the problems are “relatively easy to fix for new accruals”, once clarity has been established, “we still have to deal with promises already made”.On a more technical note, Valkenburg argued that clarity on liabilities also meant no distorting parameters such as the application of a counter-cyclical or matching premium, used under Solvency II, to pension fund valuations.“Let’s not hide reality by using these premiums but rather have the ‘right’ value, an objective value – and if there is a large underfunding, the social partners could then decide to use something like a counter-cyclical premium to define parameters for when to start taking action,” he said. Informing pension fund members about the true value of liabilities is the key to avoiding social unrest in future, according to the Actuarial Association of Europe (AAE).As part of the ongoing debate over which parameters to apply to calculate European IORPs’ solvency levels, the actuaries have compiled a discussion paper calling on regulator EIOPA to push for ‘Clarity before Solvency’.One major demand is for EIOPA to rule out the application of a single discount rate for all IORPs.Falco Valkenburg, chair of the AAE’s pensions committee, told IPE: “The discount rate is very important in EIOPA’s discussions on the holistic balance sheet (HBS), and two types of discount rates are debated – a risk-free rate or a rate based on the expected return on assets.