According to analysis published today by J.P. Morgan Asset Management, Solvency II for Pensions, could require UK pension schemes to increase funding by £600 billion or more.
‘Solvency II for Pensions', looks at the implications of the "Call for Advice on the Review of the Directive 2003/41/EC: second consultation", which closed on 2nd January 2012.
Paul Sweeting, European Head, Strategy Group at J.P. Morgan Asset Management, and one of the authors of the report, comments: "The implications of ‘Solvency II for Pensions' for UK pension schemes are tremendous. They will place additional burden on DB pension schemes and large contributions on behalf of sponsors would be necessary to bring UK pension schemes in line with the requirements."
The report finds that:
The three pillar approach to regulation set out in Solvency II and Basel II works well for insurers and banks, but the third pillar - market discipline - has no relevance to pension schemes
If Solvency 2 for pensions is introduced, we could be looking at a requirement to increase pension scheme funding by £600bn or more, if investments are required to meet not just Solvency 2 liabilities, but also the capital buffer (the Solvency Capital Requirement) and
The increased governance and reporting requirements will place an additional financial burden on DB pension scheme
Professor Sweeting added: "We question whether a regulatory framework that is designed for large-scale and active insurers is appropriate for application to pension schemes. There are, though, a number of ways in which the adverse effect of the proposals on the schemes can be mitigated. 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 (1%) added to the liability discount rate, the aggregate deficit would fall by around £200 billion. 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."