Pension Funds In Solvency II Plea

Terry Flanagan

A new study has added to growing industry concerns about European Union plans for a ‘Solvency II for pensions’.

Analysis by the U.K. arm of Deloitte, a business advisory firm, found that three-quarters of respondents to a survey of large pension schemes and their sponsors said that for an average FTSE 100 company a Solvency II-type framework for EU-based pension schemes would represent an increase of up to £2.5 billion in liabilities.

“Almost without exception, respondents are critical of the proposals,” said Feargus Mitchell, head of Deloitte’s actuarial and pension services practice.

“They believe that given the current climate, when pension deficits are already high and the economic outlook is uncertain, now is not the time to introduce new obligations that will incur further expenses and increase deficits. The proposal will be one more factor that will accelerate the decline of defined benefit pensions in the U.K..”

Earlier this month, the EU’s financial services chief, Michel Barnier, sought to allay fears that new capital rules for insurance companies will be imposed upon pension schemes.

He dismissed claims that his review of European pension fund regulation, known as the IORP directive, would cost businesses €800bn and bring about the demise of defined benefit provision. He said new capital requirements that insurers will have to hold from 2014 to reduce the risk of insolvency, under Solvency II, would not be “cut and pasted” from the insurance industry to the pensions sector.

However, Barnier does intend to reform Europe’s pension fund industry.

“In so far as insurance products and pension schemes are comparable, the regulatory framework should be similar,” said Barnier. “A valuation of assets and liabilities based on their market prices is needed in order to identify the risks involved. However, regulation must shield liabilities against excessive volatility and allow supervision authorities sufficient time to avoid pro-cyclical responses.”

The National Association of Pension Funds, a UK body which represents 1,200 pension schemes with collective assets of around $800bn, has said the proposals are not worth the risk.

“The European Commission has completely failed to make the case for a new IORP directive,” said NAPF chairman Mark Hyde Harrison. “And it has not undertaken any impact assessment that might give us confidence that the new rules could meet their objectives. Final salary pensions which are already largely closed and which will never be cross-border schemes will shut to all future accrual.”

Meanwhile, insurers breathed a sigh of relief last week after a package of measures easing the capital burden for insurers were reinserted at the last minute into Solvency II by the European parliament. Before this change of policy, global insurer Prudential, which has its headquarters in the U.K., had warned the EU that it would move its base from London to Asia in a bid to avoid the regulations.

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