Solvency II could add £600bn to funding needs – study

Written by Matt Ritchie

03/01/2012

Pension schemes could need to increase funding by £600bn if Solvency II requirements are applied to pensions, according to new research from J.P. Morgan Asset Management.

The study looks at the implications of the “Call for Advice on the Review of the Directive 2003/41/EC: second consultation”, which closed yesterday.

Announcing the results, J.P. Morgan said the £600bn cost would come through the requirement for investments to meet not just Solvency II liabilities but also the ‘Solvency Capital Requirement’.

The research found that although the three pillar approach to regulation set out in Solvency II and Basel II works well for insurers and banks, the third pillar – market discipline – has no relevance to pension schemes.

J.P. Morgan Asset Management European head, strategy group Paul Sweeting said the implications of Solvency II for schemes are “tremendous”. Large contributions from sponsors would be necessary to bring schemes into line with the requirements.

Sweeting said J.P. Morgan Asset Management questions whether the regulatory framework, designed for large scale and active insurers, was appropriate for pension schemes.

The “adverse effect” of the proposals on schemes could be mitigated, however.

“For example, allowing for an illiquidity premium in the valuation of liabilities could significantly reduce the impact of new funding rules. In fact, for every 100 basis points added to the liability discount rate, the aggregate deficit would fall by around £200bn. We hope that steps will be taken to limit the potential adverse impact of new regulation on pension schemes and their sponsoring employers. But whatever happens, the full impact of the changes must be carefully considered before any new rules are put in place,” Sweeting said.