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Solvency II plans ‘disastrous’ for pension schemes

Industry expert warns that Solvency II is going to “make life a whole lot harder” for pension schemes wishing to do buy-outs or buy-ins.

By Donia O'Loughlin | Published Nov 21, 2011 | comments

The European Insurance and Occupational Pensions Authority’s latest proposals on occcupational retirement provision in light of Solvency II would be “disastrous” for UK final salary schemes if implemented in their current form, according to Occupational Pensions Trusts.

Eiopa’s latest paper, known colloquially as IORPs, refers to adopting a consistent approach to the regulation and solvency levels applied to insurance companies and pension schemes when the Solvency II rules come into force.

Ben Shaw, development director at the Occupational Pensions Trusts, warned that the new rules will make pensions schemes’ lives “a whole lot harder”, warning schemes trustees to “get a move on” and complete buy-outs and buy-ins ahead of the new rules as costs of doing so are likely to soar.

He said: “The consultation paper talks about adopting a consistent approach to the regulation and solvency levels applying to insurance companies and pension schemes.

“[This] move would be disastrous for UK final salary schemes, imposing greater costs and increasing the rate of closure of DB [defined benefit] schemes.

“This will force pension schemes to further reduce their equity exposures because of the higher reserves they will be expected to hold against volatile investments.”

Mr Shaw also highlighted that there is talk in the consulation document about pension schemes being required to provide a quantitative measure of the strength of the employer covenant.

He said: “This is something that be extremely difficult to measure and will be a further burden on small occupational schemes, which make up 90 per cent of defined benefit schemes in the UK.

“Looking ahead, it is clear that the cost of buy-ins and buy-outs will soar. Although bulk annuity prices were stable in Q2 and the affordability of buy-in has dropped from recent highs, pricing levels could change dramatically as the threat of Solvency II draws nearer and insurers have to price in an environment of economic and regulatory uncertainty.”

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