EUROPE – UK pension funds could face a £450bn (€530bn) deficit if they were required to comply with solvency-type rules, pensions minister Steve Webb has said, basing his warning on the worst case – or benchmark – scenario used by European schemes to assess the impact of the revised IORP Directive.

The European Insurance and Occupational Pensions Authority (EIOPA) yesterday sent the preliminary results of the first quantitative impact study (QIS) for the implementation of a revised IORP Directive to the European Commission. This first QIS aimed to assess the feasibility of introducing a holistic balance sheet (HBS) approach within the new Directive.

Reacting to the findings, Webb said that those results showed the "extremely high cost" the Commission's plans would place on UK defined benefit (DB) pension schemes.

"In fact, its estimate of a baseline £450bn cost is in line with the worst-case scenario contained in figures the Pensions Regulator produced for the UK government last year," he added.

"This confirms that any such new rules would harm businesses' ability to invest, grow and create jobs, and many more schemes could be forced to close."

Webb therefore urged Brussels to drop its plans to impose Solvency II-style rules on DB pension schemes.

Also reacting to the results, consultancy Towers Watson argued that going ahead with new Europe-wide rules for calculating pension deficits would only add £150bn to funding targets for UK schemes.

However, Towers Watson noted that EIOPA had cautioned the QIS' results were "highly uncertain" and could "change considerably" if a key assumption were amended.

Mark Dowsey, senior consultant at Towers Watson, stressed that these preliminary results only estimated what new EU-wide rules might do to measured pension deficits.  

"Much of the impact would depend on what had to be done in response and within what timeframe," he said.

According to Dowsey, regulators in the UK and other European countries appeared to be warning the European authorities against producing directives "in haste" and "repenting at leisure".

"If the Commission embarks on a race against the clock to get a directive nailed down before Commissioners change jobs next year, there will almost certainly be important details that have not been thought through," he said.

The UK's Pensions Regulator (TPR) also insisted that, whatever the outcome, it would continue to work with EIOPA, the UK government and stakeholder groups to ensure that the challenges facing DB schemes and sponsors in the UK were "understood and recognised" by the EU.

The HBS proposals were originally proposed by EIOPA with the aim of achieving a common level of security for all IORPs across Europe. They comprise three scenarios to calculate pension deficits: a benchmark scenario, a lower-bound scenario and an upper-bound scenario.

Under the worst-case scenario, IORPs taking part in the QIS exercise were asked to include all types of pension benefits and to take into account ex post benefit reductions, include a risk margin based on the cost-of-capital concept, include sponsor support and pension protection schemes as an asset on the balance sheet.

By way of comparison, under the upper-bound and the lower-bound scenarios, IORPs were asked to follow the same requirements but needed to use a different basic risk-free interest rate curve and different approaches towards the inclusion of mixed benefits and risk margins.

Sending its preliminary results to the EC yesterday, EIOPA insisted that it would need to conduct further QIS exercises, allowing it to fully assess the quantitative impact of the HBS approach.

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