Treasury Today Country Profiles in association with Citi

A dying breed: pensions threatened by Solvency II

While the public sector raged against the government’s proposed cuts yesterday, the UK pension industry is busy with lobbying of its own. Fighting proposals that suggest pension schemes adopt elements of Solvency II, the sector is anxious that this regime may be the final straw for defined benefit (DB) pension schemes.

The European Insurance and Occupational Pensions Authority (EIOPA) – which has been advising the European Commission (EC) on the Solvency II project since its conception in 2004 and through its ratification in 2009 – plans to draw a parallel between the Occupational Retirement Provision (IORP) Directive and the demands of the EC’s insurance regulation. This implies that the regime will be applied to both insurance companies and pension schemes when the regulation is finally implemented.

Repeatedly postponed due to complex requirements and standards that the insurance market found difficult to meet, Solvency II’s latest 2013 deadline has now been pushed back to early 2014 – a date that may not even be met if these constant amendments continue.

Establishing a revised set of EU-wide capital requirements and risk management standards in insurance, Solvency II aims to reduce consumer loss and market disruption. However, the expectation is that its adoption to pension products – namely DB pension schemes – will actually have the opposite effect on the consumers and companies that the regime intends to protect. Insurance companies are therefore urging the UK government to resist these plans to treat DB schemes as insurance contracts.

Michaela Koller, Director General of the CEA, European (re)insurance federation warns of a significant negative impact on consumers if a number of key issues in the development and transposition of the new rules for insurers are not addressed.

“Placing excessive capital requirements on the insurance industry would have a detrimental effect: on insurers, policyholders and the economy. Should the capital requirements be overly prudent – which we hope will not be the case – those higher capital requirements, higher funding costs and reduced investment income for insurers could lead to an increase in the price of some products,” she says.

In addition, the application of the insurance standards to UK DB schemes could severely damage the liquidity and credit profiles of UK corporates with such schemes. Worst case scenario, companies may have to foot a bill to the order of hundreds of billions of pounds in order to comply. There are many corporates that simply do not have this sort of available credit.

Suffering significant hits, such as the misappropriation of pension assets by Robert Maxwell that came to light following his death in 1991, and severe accounting regulations as a consequence of financial disasters, DB funding levels are now already dwindling at best.

As Louise Barrie, Head of Defined Contribution at Legal and General Investment Management says, “Solvency II is yet another nail in the coffin for the DB pension.”