A consultation paper by the European Insurance and Occupational Pensions Authority (EIOPA)’s could see UK pension schemes increase funding by £600 million or more, according to a J.P. Morgan report.
In the report, J.P. Morgan looked at the implications of the EIOPA paper titled ‘Call for Advice on the Review of the Directive 2003/41/EC: second consultation’, and concluded that it may result in extra expenses for the industry, particularly in the area of pensions pensions.
“The implications of ‘Solvency II for Pensions’ for UK pension schemes are tremendous,” said Professor Paul Sweeting, one of the authors of the report. “They will place additional burden on [defined benefit] pension schemes and large contributions on behalf of sponsors would be necessary to bring UK pension schemes in line with the requirements.”
The three main finding of the report were:
1. solvency II’s and Basel II’s three pillar approaches work well for insurers and banks, but the third pillar – market discipline – has no relevance to pension schemes,
2. if Solvency II is introduced for pensions, it could mean a requirement to increase pension scheme funding by £600bn or more, if investments are required to meet not just Solvency II liabilities, but also the capital buffer (the Solvency Capital Requirement), and
3. the increased governance and reporting requirements will place an additional financial burden on a defined benefit pension scheme.
Prof. Sweeting went on to question whether a Solvency II scheme would be necessary for pensions, or whether it would be needlessly harmful to the sector.
“We question whether a regulatory framework that is designed for large-scale and active insurers is appropriate for application to pension schemes,” he said.
“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.”
