Understanding challenges around pension scheme discounting policies

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The lively debate around the use of the revised IORP Directive’s Holistic Balance Sheet (HBS) gives us an occasion to provide a quick overview of pension schemes’ liabilities discounting policies and asset allocation practices in Europe and in the US. We conclude by explaining the threat posed to those pension funds that continue to use fixed discount rates and we stress the importance of managing assets in line with liabilities.

What is the IORP Directive debate about?

There are currently a great variety of occupational pensions systems in the EU Member States, with significantly different regulations and prudential regimes.

This lack of a consistent framework makes it difficult to develop a harmonized Europe-wide supervisory regime for pension providers. In particular, there is currently no common framework to evaluate the liabilities of IORPs (Institutions for Occupational Retirement Provision) that operate defined benefits (DB) schemes and to compare their solvency capital requirements in a consistent way…