Last month IPE noted that 2012 would be an important year in terms of regulation for pension funds as the industry awaits a White Paper for a revised IORP directive. Needless to say, the first few days of January have already confirmed those thoughts as the pensions industry submitted its responses on the proposed revised Institutions for
Occupational Retirement Provision (IORP) Directive.

It also goes without saying that the controversial aspects of the 500-page response of European Insurance and Occupational Pensions Authority (EIOPA) to the Commission's CfA document of last year kept respondents busy before and during the Christmas break.

EIOPA was reported to have received approximately 150 responses to the consultation report on proposed changes to the IORP directive after the consultation period closed on 2 January. EIOPA is now sifting through the responses with the view to publishing a summary in February.

The first submissions seen by IPE reveal the issues of concern. There is an unsurprising consensus that applying Solvency II rules for calculating capital requirements would have a negative impact on pension schemes across Europe and therefore have a reverse effect on the original aim of ensuring security and benefit adjustment mechanisms.

In its response, the European Federation for Retirement Provision (EFRP) claims that pension security is about much more than scheme funding levels.

"A broader approach is required, taking into account the full range of mechanisms that pension institutions across different member states now use to ensure that pension incomes are safe and secure," the EFRP stresses. "An IORP can, for example, call on other kinds of risk-mitigating elements, such as a protection fund and a sponsor guarantee. Solvency capital requirements in this context are superfluous and costly and will likely lead to a further decline of employers' willingness to offer supplementary pensions."

The German Association of Pension Funds (AbA) echoes those concerns, arguing that IORPs are already subject to a risk-based management regime by their external sponsors. Those sponsors set risk limits according to their ability to make up any funding shortfalls. "Further solvency capital requirements in this context are an inefficient use of capital which could lead to an increase in systemic risk,"
AbA argues.

In the UK, the National Association of Pension Funds (NAPF) also notes that EIOPA acknowledged that the Solvency II capital requirements could "undermine the cost-
efficiency of occupational retirement provision in the EU".

Neither do other measures such as the holistic balance sheet (HBS) approach, which could replace Solvency II capital requirements, seem to be an option. While AbA insists that risk-based capital requirements are inappropriate for IORPs, the EFRP stresses that the HBS is far too complex to be a sustainable primary tool of supervision.

"Workplace pensions are based on social and cultural traditions and strongly linked to
first-pillar pension provision in the different member states," the EFRP points out. "Pension security is about much more than scheme funding levels alone, and a single approach to pension security that only focuses on short-term solvency will jeopardise many existing European pension systems."

EIOPA's Occupational Pensions Stakeholder Group (OPSG) therefore recommends both an impact assessment and a quantitative impact study (QIS) before deciding whether a HBS should be adopted. In its response, EIOPA states: "With no clear insight into the possible consequences, not even by EIOPA itself, no sensible decision on principles can and should be made."

And the concerns raised by the whole industry are not confined to capital requirement measures. The OPSG, among others, also argues against the ring-fencing approach proposed in the revised directive. According to the stakeholder group, such measures for cross-border pension funds should not be mandatory and the decision to apply ring-fencing should rather be left to member states.

In spite of all the concerns raised over the revised directive, the industry recognises the legitimacy of introducing more supervision as well as transparency and accountability for cross-border funds. It now remains to be seen whether and to what extent the European Commission takes into account the issues raised.