Solvency II could add £600bn to funding needs – study
Written by Matt Ritchie
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.
Francesca Fabrizi talks to Jonathan Bull, chief executive of OPDU, about the merits of having trustee liability insurance
Laura Blows provides a summary of the big pensions stories to have hit the headlines this week
PMI and NAPF discuss possible merger
‘Compulsion not the answer for automatic enrolment’, Webb argues
Pensions industry urges caution as the Taxation of Pensions Bill is published
Case for lifting Nest restrictions now ‘unanswerable’ - TUC
Pension freedoms could unleash new PPI scandal
UK needs an independent retirement savings commission, NAPF says
SMEs call for better provider websites and less jargon to assist with AE
TPR expects AE non-compliance to rise