EUROPE - Hopes that the IORP Directive would water down Solvency II for pension funds looked unrealistic this week - with major implications for real estate allocations - as a consultation began on likely capital requirement provisions.

The European Insurance and Occupational Pensions Authority (EIOPA) launched the consultation last week on quantifying the impact of its proposed new directive for occupational pensions.

Industry leaders had warned that pension funds would allocate away from real estate unless EIOPA responded to industry lobbying for a 'Solvency II-lite'.

But PwC real estate funds partner John Forbes said the basis for assessing how much extra capital pensions funds would need to hold against the risk of unexpected events was "unsurprisingly very, very similar" to that agreed for insurance companies.

"Those expecting IORP to be 'Solvency II lite' for pension funds are going to find it is full fat with whipped cream and a cherry on top," he Tweeted earlier this week.

Yesterday, he said the proposal, if accepted, risked killing off direct defined benefit pension schemes and traditional life products because it would encourage more defined contribution and unit-linked products that pass investment risks to insurers' individual policyholders.

Real estate shock provisions within the Solvency II model - and replicated in the proposals out for consultation until the end of July - assume a 25% fall in property values.

The assumption would prove as unappealing to defined benefit pension schemes as it would to insurers, said Forbes.

"Using the standard model, real estate investors would have to generate a higher return to justify the additional cost [of capital]," he said. "Within the industry, the concern is that it will encourage people to leave real estate."

Asked whether he expected to see an exodus from real estate as a result, he said: "Nobody really knows the answer yet."

His comments followed a speech by Steve Webb in which the UK pensions minister described EIOPA's plans to extend the provisions of Solvency II to pension schemes as "pointless".

According to a statement issued by the Department of Work and Pensions, the UK government remains "resolute" in its opposition to IORP.

"The European Commission has said it is listening and has just announced an extension to its timetable," it said.

"However, this prolonged uncertainty still means schemes are increasingly unsure about their long-term investment strategies. We will not let up until we make the Commission see sense."

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