The European Insurance and Occupational Pensions Authority (EIOPA) is expected to publish its consultation on its holistic balance sheet (HBS) in the coming days as amendments to the IORP II Directive continue.

Recent changes under the Italian presidency have increased concerns that the European Commission could introduce solvency requirements as Level 2 regulation.

EIOPA’s separate work on formulating an HBS has been ongoing for the better part of a year, with a formal consultation expected by the end of next week.

IPE understands it will offer respondents the chance to comment on six varying models, along with numerous questions so the supervisory authority can understand how it should formulate a regime.

The HBS’s introduction stems from the pillar-one solvency requirements for occupational pension funds, originally included in the IORP II Directive.

However, after EIOPA’s own quantitative impact study (QIS) showed dramatic effects on some EU pension markets, as well as lobbying by potentially affected governments, solvency requirements were dropped.

EIOPA continued with the formulation of the HBS idea, which it said would allow pension funds to recognise the value of “all security and benefit-adjustment mechanisms” at their disposal.

It also previously said the HBS would formulate a means of incorporating the varying occupational pension structures in the EU into a single prudential regime.

However, as the authority gears up to consult with the market on its proposals, recent amendments made to the IORP II Directive have raised concerns in the industry, despite solvency requirements being initially dropped from the document.

The new draft of the Directive was drawn up in consultation with member states by the Italian government, which currently holds the rotating presidency of the Council of the EU.

Eversheds, a law firm based in the UK, said although there were no funding requirements in the Directive, Articles 29 and 30 gave the Commission power to direct how schemes conduct internal risk assessments, which could include a stress test using the HBS.

Tim Smith, senior associate at Eversheds, said: “You could get a new funding requirement by the back door.”

He said further discussions had led the firm to believe this was a distinct possibility.

In the Directive released earlier this year, Article 30 included the line that specified a risk-evaluation model for pensions “shall not impose additional funding requirements beyond those foreseen in this Directive”.

However, in the latest version of amendments, this line has been removed, essentially allowing the Commission and EIOPA to issue solvency guidelines to national authorities as they see fit.

“This will be linked with the EIOPA consultation,” Smith said. “If they can get it to a state where the HBS is recognised as a funding measure, it increases the likelihood the Commission might require schemes to use it in internal stress testing.” 

While the industry awaits publication of the consultation, IPE understands the HBS will provide significant positive weighting to the scheme/sponsor covenant, potentially easing fears in the UK private sector market.

IPE also understands EIOPA has yet to conduct significant work on what its second QIS would entail, or how the Authority would conduct stress testing for IORPs, which is expected in 2015.

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