Solvency II directive has European DB plans seeing red
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • Varagon Capital fills new business development role
      Fitch Group in deal to acquire CreditSights
      Credit managers’ outlook still gloomy but brightening – survey
      Digital Colony picks head of Europe capital formation
    • Will Martindale
      Cardano Group chooses group head of sustainability
      Meketa hires first chief marketing officer
      Nick Horsfall
      Redington names managing directors for investment consulting team
      Marsh & McLennan Agency sets sights on Compass Financial
    • New York State Common challenges Tyson’s dual-share stock structure
      Credit managers’ outlook still gloomy but brightening – survey
      Investors call for action on COVID-19-induced humanitarian crisis at sea
      U.S. jobs worker restaurant
      Job market slipped in December as virus surge hindered activity
    • Ascensus, Empower acquire Truist record-keeping business
      PCS Retirement acquires Alliance Benefit Group-Rocky Mountain
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • New law requires MassPRIM to increase diversity of managers, consultants
      Impact investors getting savvier, more efficient – report
      SSGA alum named head of ESG at Mirova
      Aegon moves to cut carbon from workplace DC business
    • Blackstone holiday video
      Blackstone would like to show you how things are done around the office
      Galina Churkina
      Building research earns honor from Aquila Capital
      MacArthur Foundation invests in women’s safe housing fund
      CAIA’s expansion to online exams yields big results
    • Shanghai skyline
      Global hedge funds struggle even in a more open China market
      The Sun Hung Kai Properties Ltd. logo is displayed on the Sun Hung Kai Centre building in Hong Kong on Sept. 13, 2018
      SHK spins out East Point Asset Management
      Man holding a business card with Hedge Fund written on it
      Hedge funds chalk up decade’s best returns in 2020 – HFR
      New hedge fund launches surpass liquidations in third quarter
    • New York State Common challenges Tyson’s dual-share stock structure
      A sign on the exterior of a Northern Trust Corp. branch in Chicago on July 13, 2017
      Northern Trust to cut 500 jobs
      Wells Fargo targets $8 billion in cuts
      Maine Public Employees boosts target to alternative credit
    • A sign on the exterior of a Northern Trust Corp. branch in Chicago on July 13, 2017
      Northern Trust to cut 500 jobs
      Wells Fargo targets $8 billion in cuts
      A sign at a China Telecom Corp. store in Shanghai on Jan. 6, 2021
      Managers make further divestments from sanctioned Chinese firms
      The Chinese flag flies in front of the Liaison Office of the Central People's Government in Hong Kong on May 22, 2020
      Standard Life Aberdeen JV to open mainland China pension insurance company
    • Maine Public Employees boosts target to alternative credit
      Los Angeles City Deferred Comp narrows list to 2 in manager search
      Connecticut pension fund CIO resigns
      Arizona State Retirement looking for CIO
    • Sharmila Chatterjee Kassam
      AIF Institute hires former Texas ERS deputy CIO as executive director
      Varagon Capital fills new business development role
      SSGA alum named head of ESG at Mirova
      Capital Group hires BlackRock executive to launch ETF unit
    • Pension funds continue private equity investing spree
      Big jump in private equity AUM expected over next 5 years
      Thoma Bravo takes in $22.8 billion for 3 funds
      Jason Thomas
      Data, technology become new prized possessions
    • Ivanhoe Cambridge Inc. signage is displayed outside the company's office near Bay Street in Toronto on Aug. 29, 2011
      Ivanhoe Cambridge, PAG announce joint venture for Japan logistics investments
      Residential buildings in Hong Kong on Feb. 20, 2020
      KKR closes first Asia-Pacific real estate fund at $1.7 billion
      CPPIB in deal with Greystar to develop U.S. housing
      Global real estate investments to hit $79 billion in 2021 – survey
    • Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Outlook 2021
      The top 10 stories of 2020
      The best places to work in money management
      Investment consultants
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • San Jose Federated commits $11 million to real estate fund
      Essex Pension Fund on the lookout for private debt manager
      Lexington Contributory wants large-cap equity manager
      Fort Lauderdale fund scouting for large-cap manager
    • San Jose Federated commits $11 million to real estate fund
      Essex Pension Fund on the lookout for private debt manager
      Lexington Contributory wants large-cap equity manager
      Fort Lauderdale fund scouting for large-cap manager
    • International Small Cap Manager Services
      Financial Expertise
      Passive Index Manager Services
      Emerging Markets Equity Investment Management Services
    • U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
      Hedge funds warming up to financial sector, remain long U.S. equities
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Retirement cartoon
      Hopes rising for retirement readiness in 2021
      view gallery
      25 photos
      2020 in editorial Cartoons
      view gallery
      25 photos
      Cartoons depict a year like no other
      Consultants cartoon
      Seeking an investment consultant? Caveat emptor
    • Climate change and emerging markets after Covid-19
      An Asset Owner's Guide to Multi-Manager Portfolio Management
      Research for Institutional Money Management
      The Future of the U.S. Dollar - Dominant currency or one of many?
    • Michael McNally
      Commentary: New ‘investment-plus’ test poses risks to private equity investors
      Adam Waterous
      Commentary: Institutions urged to act now on opportunities created by current global oil disruption
      Ron Lagnado
      Commentary: Straw man critiques don’t hold up in face of real world success
      Robert Raben
      Commentary: What the asset management industry must do to bolster diversity
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
      Sponsored Content By Aberdeen Standard Investments
      Taking a passive approach to the hedge-fund universe
      Sponsored Content By World Gold Council
      Gold: the most effective commodity investment
      Sponsored Content By Moody's Analytics
      The Industrialization of ESG Investment
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      1:24
      U.S. stocks were 2020’s comeback kid
      watch video
      1:23
      Outlook 2021
      watch video
      1:52
      Buy gold's pullback?
      Coronavirus and the S&P 500: 2020
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
    • POLL: Retirement issues in 2021
      POLL: Money managers' priority in Asia-Pacific region
      POLL: Retirement issues in the presidential election
      POLL: The S&P 500 in the third quarter
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • Graphic: U.S. stocks were 2020's comeback kid
      U.S. fixed-income returns post another positive year
      By the Numbers
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Getting Back to Normal: How to Creatively Manage Fixed Income Portfolios in a Rising Rate Environment
      What might a Biden DOL and SEC mean for retirement plans?
      Staying on target with target-date funds
      The Institutionalization of Retail Part Two: A Webinar Series from P&I Content Solutions and Chestnut Advisory Group
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. REGULATION AND LEGISLATION
April 15, 2013 01:00 AM

Solvency II directive has European DB plans seeing red

  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Bloomberg

    Opposition is intensifying against a European Commission proposal to apply to defined benefit funds a set of regulations originally targeting insurance companies, as the initiative moved a step closer to becoming reality.

    “This is the No. 1 regulatory threat to U.K. pension schemes,” said James Walsh, London-based EU and international senior policy adviser at the National Association of Pension Funds.

    Released earlier this month, a quantitative impact study on the affect of Solvency II regulations on pension funds estimated that combined U.K. defined benefit deficits alone would rise to about £450 billion ($689.5 billion), or a 24% shortfall measured against risk-free liabilities. In comparison, the current aggregate deficit of about 6,300 plans tracked by the Pension Protection Fund is estimated around £237 billion as of March 31.

    Other major DB markets such as the Netherlands, Ireland, Germany and Belgium would also be worse off, although not likely to the extent of the U.K. All five nations are opposing the EC proposal, which aims to use at least portions of the Solvency II regulations as a blueprint for the new Holistic Balance Sheet provision within the Institutions for Occupational Retirement Provision II Directive.

    Critics point to the increase in costs to companies at a time when the European economy is already in the doldrums. Furthermore, any additional pressure on pension plans will likely result in a quicker pace of DB plan closures, sources said.

    “This confirms that any such new rules would harm businesses' ability to invest, grow and create jobs, and many more schemes could be forced to close,” U.K. Pensions Minister Steve Webb said in a statement following the publication of the report, titled “Preliminary Results for the European Commission.”

    The commission previously estimated the cost of implementing Solvency II for the European insurance sector to be between e2 billion ($2.6 billion) to 3 billion over a period of five years, partly because of the cost of meeting new data requirements.

    “If applied to the pension industry, there will be the same problems of recalibrating the data in order to report back to the regulators, and the cost associated with that,” said Mark Westwell, London-based senior vice president and regional client management executive in Europe, the Middle East and Africa for State Street Global Services who advises clients on Solvency II.

    Another “real concern” is that the proposed regulations would accelerate the shift of plan investments to bonds from equities, potentially harming economic growth in the region, Mr. Walsh added. “The left and right hands of (the EC) are not working together. On the one hand, the commission just published last week a green paper encouraging pension schemes to have a bigger role in helping the European economy to grow through investments.”

    Valuation of capital

    Under Solvency II, one of the key elements is the valuation of capital requirements based on the level of investment risk taken, adjusted for various factors such as portfolio diversification. According to data provided by Russell Investments, the average equity allocation among European pension funds is about 40%, compared with about 5% among insurance companies in the region. As a result, insurers have much larger exposures to low-risk government bonds.

    “Pension funds and insurance companies might have some similarities but are really different animals,” according to Farid Kabbaj, director of investment strategy and solutions at Russell Investments, Amsterdam. “The investment management and regulation of insurance companies is based on the idea that the company should provide an absolute guaranteed benefit to the policyholders. Therefore solvency buffers should be high and the amount invested in risky assets such as equity should be low.”

    “It does not make sense to copy this approach directly to pension funds,” Mr. Kabbaj said. Firstly, pension funds do not have to provide an absolute guarantee as the sponsor covenant. Furthermore, the returns needed by pension funds to close the deficits are substantially higher than the risk-free rate of return.

    “This means that a high proportion of assets should be allocated to equity, currently over 40% on average, which the high Solvency II buffers do not support,” he added.

    The intent of the European Commission's proposal is to act as a basis for the IORP II Directive regulating European defined benefit plans in an effort to improve risk management and governance as well as to add consistency in the valuation of assets and liabilities across the region.

    For example, discount rates used to calculate pension liabilities vary widely, with the Netherlands using an adjusted swap curve that comes closest to the rate prescribed under Solvency II. The U.K., Germany, Ireland and Belgium use various interpretations of an expected rate of return on assets, according to the study, conducted by the European Insurance and Occupational Pensions Authority.

    Other countries included in the study are Norway, Sweden and Portugal.

    Solvency II impact varies

    As a result, the impact of Solvency II also varies. For example, the deficits of Dutch pension funds would deepen to 21% of liabilities, compared with the current 17%. The Netherlands is the second largest DB market in Europe by assets, behind the U.K. The two countries account for about 75% of total DB assets in Europe.

    The study did not take into account the ability for Dutch pension funds to cut benefits, which would improve both funding ratio and solvency requirements, according to Niels Kortleve, member of the committee on international affairs in the Federation of Dutch Pension Funds.

    “This is a severe misrepresentation. Including the benefit cuts would lead to a more sustainable situations,” said Mr. Kortleve, who is also innovation manager at PGGM, fiduciary manager of the e129 billion Pensioenfonds Zorg en Welzijn, Zeist, Netherlands.

    But not all countries would be worse off. The surplus for Swedish pension funds, for example, would likely rise to 13% from 8% of liabilities.

    Mark Dowsey, senior consultant at Towers Watson in London, said the EC's “notion of getting to a position in which there is more consistent valuation of pension liabilities between pension schemes from one country to another is sound.” However, the commission might potentially rush through a new set of regulations without considering its full impact.

    “It's a difficult balancing act,” Mr. Dowsey said. “In the attempt to mitigate risk, (the commission) needs to be careful not to introduce a whole new set of systemic risk.”

    The results within the study itself might need to be revised, sources said. Jane Beverley, principal and head of research at consultant Punter Southall in London, pointed out, for example, that the EIOPA's results are based on data from about 100 individual IORPs, or pension funds, out of an estimated 140,000 funds within the EU. “The IORPs that provided data tended to be the largest schemes and may therefore not represent true experience across all scheme sizes,” she added.

    The EIOPA also warned that its results must be treated with caution and “a number of issues had not been resolved yet and further work needs to be undertaken,” according to the study. The organization is scheduled to publish its final report by the end of June.

    A wholesale application of Solvency II to pension funds remains unlikely, sources said, but they fear any additional regulations will further damage an already wounded DB system. With yields in government bonds being particularly low, regulations that drive pension funds to shift even more assets into the asset class would potentially require companies to increase contributions as real returns diminish amid widening deficit levels, said Lena Tochtermann, principal policy adviser at the Confederation of British Industry, a lobbying group representing U.K. businesses based in London. As a result, companies would have less to invest in their businesses.

    “It's more risky for pension schemes and their sponsors,” Ms. Tochtermann said.

    The EC could either postpone the introduction of Solvency II for pension funds until deficits have been closed, or change the regulation to reflect the specifics of pension funds. Mr. Kabbaj of Russell added: “More should be done to tailor the regulation to pension funds. “

    Related Articles
    Denmark reveals mark-to-market trap Europe is considering
    SEI: Pension accounting moves don't affect companies, investors
    Reforms still needed to aid investors, CFA speakers say
    EC's occupational retirement proposal stays the course; U.K. pension industry c…
    EIOPA renews consideration of solvency rules for pension funds
    Recommended for You
    Investors hail SEC guidelines on exchanges
    Investors hail SEC guidelines on exchanges
    Standards-of-conduct rules approved along party lines
    Standards-of-conduct rules approved along party lines
    SEC passes Reg BI package by 3-1 vote
    SEC passes Reg BI package by 3-1 vote
    Research for Institutional Money Management
    Sponsored Content: Research for Institutional Money Management
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Climate change and emerging markets after Covid-19
    An Asset Owner's Guide to Multi-Manager Portfolio Management
    Research for Institutional Money Management
    Bond ETFs show maturity during Covid market mayhem
    Global gold-backed ETFs: A popular gateway to the gold market
    The Future of the U.S. Dollar - Dominant currency or one of many?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center