EUROPE - The European pensions industry has responded with keen interest to the Call for Advice on revisions to the IORP directive, particularly with respect to its possible inclusion of Solvency II capital requirements.

Over the holiday break, the European Insurance and Occupational Pensions Authority (EIOPA) received approximately 150 responses to its 500-page consultation report on proposed changes to the Institutions for Occupational Retirement Provision (IORP) directive, IPE understands.

EIOPA is now sifting through the responses to the Call for Advice, which closed on 2 January, with the view to publishing a summary some time in the second half of February.

One of the main concerns raised by the pensions industry since the launch of the consultation process in November stemmed from EIOPA's question on whether funding provisions in the new directive should be similar to those found in the Solvency II framework.

Pension experts have since argued that Solvency II measures have no place in the consultation, saying the capital requirements proposed under the new regulation would be a cost burden on company sponsors, and that the IORP directive should therefore focus solely on cross-border activities.

A report published today by JP Morgan Asset Management (JPMAM) estimates that the cost to UK pension funds alone would increase significantly.

It argues that the new Solvency II requirements could force local schemes to increase funding by £600bn (€719bn) if investments are required to meet Solvency II liabilities.

According to the study, the three-pillar approach to regulation set out in Solvency II and Basel III may work well for insurers and banks, but the third pillar - market discipline - has no relevance to pension schemes.

In addition, JPMAM argues that the increased governance and reporting requirements will place an additional financial burden on defined benefit (DB) pension schemes.

Paul Sweeting, European head of JPMAM's strategy group, said: "We question whether a regulatory framework that is designed for large-scale and active insurers is appropriate for application to pension schemes."

Sweeting did offer a number of ways in which the proposals' adverse effects could be mitigated, however.

"For example, allowing for an illiquidity premium in the valuation of liabilities could significantly reduce the impact of new funding rules," he said.

"In fact, for every 100 basis points (1%) added to the liability discount rate, the aggregate deficit would fall by around £200bn."

However, Charles Cowling, managing director at JLT Pension Capital Strategies, suggests the situation could be even worse for UK schemes than JPMAM anticipates.

According to Cowling, the £600bn figure cited by the asset manager could reach as high as £1trn, depending on how the rules are implemented.

"It is probably too late for this Pandora's box to be closed," he added. "Probably the best (and likeliest) outcome for UK companies is to plead for a very long transition period - possibly as much as 20 years.

"As the recent ACA survey has revealed, DB pensions in the private sector are already declining rapidly.

"A 20-year transition period for new solvency regulations would give time for companies to achieve an orderly exit from their pension obligations with limited damage on our economy - leaving DB pensions for the privileged public sector."