Patrick Burke, whose organisation represents 350 members in charge of more than 90bn in assets, said that if the Solvency II regulations, due to be announced on Tuesday, forced pension funds to maintain a certain level of capital to cover liabilities, finance managers would have to sell off equity investments to generate ready cash so they could guarantee their benefits.

"Pension benefits would become unaffordable with the introduction of a guarantee, " said Burke, who is also director of investment development at Irish Life Investment Managers. "To end up in an insured arrangement for pensions would dramatically increase costs."

He said a switch from an "expectation of returns" to a "guarantee of benefits" regime would force fund managers to pile into the bond markets to avoid the "enduring volatility" of the stock market and satisfy capital adequacy rules.

This would not only limit their flexibility, he said, but would effectively regulate into existence a shortfall where there wasn't one previously.

To hedge this shortfall risk, fund supervisors would have to create buffers to meet funding requirements in the event of a dip in financial markets, pushing them towards less risky but lower-yielding investments and possibly depressing overall equity prices.

"These proposals could require pension funds to invest in products with less potential return, " said Frank O'Dwyer, chief executive of the Irish Association of Asset Managers. "In the long term, maintaining the same benefits will require even higher contributions by both employers and employees."

O'Dwyer also expressed concern that Solvency II would apply a short-term measurement period to a long-term project . . .

something he said was inappropriate to pensions.

The Solvency II directive is meant to create a more risk-sensitive environment for the European insurance industry and move the internal market towards greater harmonisation. The sector has broadly welcomed its introduction, as well as the related Basel II standards for banking, since the regulations are expected to take into account the increasing risk-analysis sophistication of the industry, in many cases reducing the amount of capital a lender or insurer has to maintain on its balance sheet. Irish Life and Permanent, to take one example, has said it could ultimately release up to $1.4bn in excess capital to shareholders once both regimes are fully in effect in 2010.

But last summer, Soren Bjerre-Nielsen, Danish chairman of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), which advises the European Commission, came out in support of Solvency II-type rules for pension funds, sparking a torrent of criticism from industry players in Ireland, the UK and the Netherlands who said such a move would put an end to companysponsored schemes and inhibit the growth of a pan-European market for pensions.

Burke said Solvency II is the "most worrying agenda item on the horizon" for IAPF members, eclipsing even other concerns such as the gap between public and private sector pensions.

But Garvin O'Neill, head of insurance regulatory practice at PWC, said although in the current framework Solvency II will put pressure on funds to take sub-optimal decisions, it is too early in the deliberation process to panic about the ultimate effects of the directive.

"You could work yourself into a lather worrying about something that might not happen, " he said. "Detailed rules could take years to agree, but we do need to have a conversation to make sure counterproductive actions don't follow from regulations that don't appreciate the business to which they apply."