Solvency II To Impact On Europe’s Pensions Sector, Warns KPMG

Terry Flanagan

Leading auditor KPMG says the pension industry and wider European economy will be badly affected by the European Union’s Solvency II plans.

The Solvency II directive, new capital requirements that insurance companies are likely to have to hold from 2014 to reduce the risk of insolvency, is likely to cause knock-on effects to the pensions industry, according to a new report by KPMG.

The final requirements on the matching premium and counter-cyclical premium, which determine the way insurers’ liabilities are calculated, are the two issues KPMG believes will have the greatest impact on European firms’ capital requirements and consequently the annuities market.

Phil Smart, UK head of solvency at KPMG, said: “In the UK, this could mean that annuities may need to be priced at such a level that consumers would find unacceptable, and potentially become uneconomical for insurance firms to offer.”

Analysts also believe that the EU’s new Solvency II rules will make it harder for insurance companies to hold infrastructure projects and other alternative assets – such as private equity and hedge funds – on their balance sheets. Stricter capital rules are likely to mean insurers will have to hold ‘safer’ assets.

George Osborne, the UK chancellor of the exchequer, last November pinned the country’s recovery hopes on pension funds and other institutional investors being able to stump up towards fixing Britain’s creaking roads, railways and power stations.

This plan to unlock £20bn in pension assets to overhaul physical infrastructure in Britain may hit the buffers, however, due to the latest European Commission plans for Solvency II.

Smart added: “Many European insurers have been significant investors in infrastructure and real estate investments, which provide reliable and stable cash flows, hence providing a good match to the cash outflows on annuity type products.

“By imposing high capital charges on these investment classes for regulatory purposes, the risk-adjusted returns may become unattractive and insurers needing additional solvency will likely choose to change their investment portfolios – potentially resulting in a significant withdrawal of funds, which could have an impact on the wider European growth agenda.”

In addition, there are concerns that the whole fund management sector, and not just the insurance industry, could be bound to Solvency II-type legislation.

Last week, the European Union’s financial services chief, Michel Barnier, was forced to allay growing fears that pension schemes would be chained to similar rules to those of insurance companies.

He said, via his Twitter account, that Solvency II would not be “cut and pasted” from the insurance industry to the pensions sector.

The Solvency II directive, which is to replace the original 1973 law, aims to unify the insurance market with a revised set of EU-wide capital requirements and risk management standards that will enhance consumer protection. It has, however, been beset with delays and has yet to be approved by the European Parliament but UK regulator the Financial Services Authority still predicts that it will enter into force, as planned, on January 1, 2014.

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