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Solvency II requirements in IORP directive would be 'catastrophic' – LCP

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  • Solvency II requirements in IORP directive would be 'catastrophic' – LCP

EUROPE - Introducing Solvency II measures within the Institutions for Occupational Retirement Provision (IORP) directive could lead to an important increase in funding requirements and deeply impact defined benefit (DB) pensions schemes, the consultancy LCP has warned.  

Following the launch of the second consultation period on the IORP directive by the European Insurance and Occupational Pensions Authority (EIOPA), LCP said it feared that the implementation of Solvency II capital requirements would affect DB pension schemes.

Jonathan Camfield, partner at the consultancy, said: "It is no exaggeration to say this has the potential to be catastrophic for DB pension schemes and equity markets in the UK. 

"Total funding requirements could increase significantly - for example, by £500bn (€575bn) - which could lead to company insolvencies as cash calls rocket."

Nonetheless, Camfield welcomed the fact EIOPA recognised the differences between pension schemes and insurance companies.

EIOPA has suggested that one way forward might be to have a two-tier approach to funding pension schemes across Europe, with the implication being that the UK would be able to continue with something closer to its current regime, at least in the medium term.

"However," Camfield added, "even if this were to be the case, EIOPA is recommending that a complex 'holistic balance sheet' would need to be produced for each pension scheme, showing the difference between this approach and a Solvency II-style approach, and also putting a financial value on things such as the strength of a sponsor's covenant."

Meanwhile, Towers Watson has argued that the viability of the IORP directive will depend on the outcomes of a quantitative impact assessment.

Mark Dowsey, senior consultant, said: "The Commission asked EIOPA how funding requirements should be further harmonised, not whether they should be. 

"EIOPA has thrown some sand in the gears by insisting that the viability of its favoured framework depends on what this would do to the companies and pension funds affected."

EIOPA's draft advice indicates that if the existing directive is replaced by a more harmonised system, all "security mechanisms" - including the possibility of further support from the sponsoring employer - should be "valued explicitly" when judging whether there is adequate support for the benefits the scheme is due to pay out.

It also suggests that deficit recovery periods might ordinarily be limited to around 15 years.

However, Towers Watson has criticised the fact that EIOPA is only giving interested parties 10 weeks to respond to the 517-page consultation document.

Finally, the UK's National Association of Pension Funds (NAPF) said it would be lobbying EIOPA actively to show why Solvency II would be inappropriate for UK pension schemes.

Darren Philp, director of policy, said: "We hope EIOPA will realise the unsuitability of these rules and that it will make this clear to the European Commission."

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