EUROPE – Brussels is unlikely to draft a revised IORP Directive using any of the three scenarios set for the holistic balance sheet approach (HBS), as it would lead to an economically unaffordable regime for European occupational pensions, Towers Watson has said.

The European Insurance and Occupational Pensions Authority (EIOPA) earlier this week sent the preliminary results of the first quantitative impact study (QIS) for the new IORP Directive to the European Commission. This first exercise aimed to assess the quantitative impact of the HBS approach, with participating funds asked to assess the impact employing three scenarios – the benchmark approach, as well as the upper-bound and lower-bound scenarios.

As noted by the UK industry – voicing fierce criticism of the impact Solvency II-type rules could have on its pension industry – the preliminary results show that the HBS approach could lead to a deficit of around £450bn (€530bn) for UK pension schemes.

However, those results only reflected the calculations made under the benchmark scenario, which proved particularly restrictive for the UK industry. The final outcome under an upper-bound scenario would differ fundamentally, showing a solvency surplus for the UK pension industry of £1.2trn.

Dave Roberts and Mark Dowsey, both senior consultants at Towers Watson, noted in a written response to IPE the challenges the Commission would face in trying to propose a regime acceptable to all countries.

"While the upper bound set might appear more favourable for the UK, it appears less so for the Netherlands due to the absence of sponsor support," they said.

Roberts went on to say that, in an upper-bound scenario, the potential maximum value of sponsor support was being counted as an asset. This, according to him, results in a large aggregate surplus owing to sponsors having the whole of their potential support included in the calculation.

"However, the position would still look bleak for schemes where the sponsor was in deficit on the benchmark approach," Roberts said.

"In practice, it seems highly unlikely that the ‘end regime’ will be one of the sets of assumptions already consulted on."

Towers Watson nonetheless pointed out that none of the three scenarios are likely to be implemented by Brussels in the new IORP Directive.

"The Commission won't draft any economically unaffordable regime, as it would be thrown out by the Parliament and the Council," Roberts added.  

"The QIS output will only help the Commission to frame a draft that it believes will be politically acceptable."

The pension schemes that took part in the three month exercise launched last October were required to calculate their solvency ratio using three different scenarios: a benchmark scenario, an upper-bound scenario and a lower-bound scenario.

Under the benchmark scenario, IORPs were asked to include all types of pension benefits and to take into account ex post benefit reductions, include a risk margin based on the cost-of-capital concept, include sponsor support and pension protection schemes as an asset on the balance sheet.

By way of comparison, under the upper-bound and the lower-bound scenarios, IORPs were asked to follow the same requirements but needed to use a different basic risk-free interest rate curve and different approaches towards the inclusion of mixed benefits and risk margins.

The schemes taking part in the first QIS are located in Belgium, Germany, Ireland, the Netherlands, Norway, Sweden and the UK.