Solvency II Fears For Pension Funds

Terry Flanagan

The European Union’s financial services chief has sought to allay fears that new capital rules for insurance companies will be imposed upon work pension schemes.

Critics say the proposed reform of occupational pensions by Michel Barnier would force the closure of the remaining defined benefit pension funds across Europe, resulting in systemic risk spreading through the pension fund investment sector.

However, Barnier today posted on his Twitter account, shortly before launching the review of European pension fund regulation, that Solvency II, the new capital requirements that insurers will have to hold from 2014 to reduce the risk of insolvency, would not be “cut and pasted” from the insurance industry to the pensions sector.

The National Association of Pension Funds, a UK body which represents 1,200 pension schemes with collective assets of around $800bn, today claimed Barnier’s directive was “reckless” and “not worth the risk”.

Under the planned proposals, the European Commission is looking to force occupational pension funds to avoid risky investments and to hold larger cash buffers to guard against market volatility, while increasing cross-border competition and tightening supervision.

However, some economists have warned that the proposals will lead to the closure of many defined benefit schemes as they will become too expensive for employers to maintain.

NAPF chairman Mark Hyde Harrison said: “This is the wrong directive at the wrong time. The European Commission has completely failed to make the case for a new directive.”

The plans, which are likely to emerge as a legislative proposal at the end of this year, are most strongly opposed in the UK, Netherlands, Belgium and Ireland, where final salary pension schemes are most prevalent.

In a rare joint plea, a group of eight industry-wide bodies had earlier in the day come together to highlight concerns over Barnier’s plans.

Claude Kremer, president of the European Fund and Asset Management Association, said: “There is strong evidence that applying Solvency II rules to pension funds would increase the administrative burden and financial costs, discourage employers to set up defined contribution schemes, accelerate the process of defined-benefit schemes closure in Europe and reduce benefits for pension savers.”

While Dörte Höppner, secretary-general of the European Private Equity and Venture Capital Association, said: “Pension schemes that guarantee a secure income for millions of Europe’s pensioners, are also an important source of capital for long term investors such as venture capital and private equity, which in turn generate income for pensioners by investing in innovation and growth. Applying Solvency II to pension schemes would severely jeopardise this virtuous circle of value creation.”

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