Pensions industry hits back over Solvency II

The biggest pension funds in Europe have warned that EU plans to base new regulations on insurance rules, known as Solvency II, could have a hugely detrimental effect on investments and, ultimately, the region’s economy.

Dick Sluimers, chief executive of APG Asset Management, which runs one of Europe’s largest pension funds ABP, and Chris Verhaegen, the secretary-general of the European Federation for Retirement Provision, a pensions lobby group, told Financial News that they wanted Brussels to abandon plans to “impose a short-term solvency regime upon the most long-term investors of all”. They warned that applying the rules to pension funds would drain capital away from equities, real estate and infrastructure opportunities.

Solvency II will be applied to EU-based insurance companies from either 2013 or 2014. It requires them to put aside larger capital buffers for investments that the regulators deem to be risky. Last week, rating agency Fitch said the requirement would reduce insurers’ allocations to long-dated and low-rated corporate bonds, property, equity and some alternative investments.

Although Michel Barnier, European commissioner for internal market and services, has said differences between pension funds and insurance companies will be taken into account when drawing up the rules, pension schemes and their trade associations remain worried.

James Walsh, a senior policy adviser at the National Association of Pension Funds, said: “If you look at the text of the commissioner’s recent call for advice, it’s quite an indication of the direction of travel. It states that Solvency II is the starting point, and we think it’s the wrong starting point.”

Comparing apples and oranges

Sluimers said: “European pension funds manage €3 trillion, with 55% of that in real assets, like equities and real estate. But if they are subject to a regulatory framework designed for insurers, it is very likely they will start to act like insurers. If pension trustees decide to lower the proportion of real assets to 20% – in line with the typical asset allocation of insurers – over €1 trillion of long-term capital would be withdrawn from the financial markets. Those funds will no longer be available for Europe’s blue chips, small enterprises, innovative start-up companies and infrastructure projects.”

Verhaegen added: “The programme for financial market reform, put forward by the Commission in response to the crisis, aims at enhancing financial stability. However, a Solvency II-type regime will jeopardise the stabilising role that pension funds tend to play in financial markets.

“The crisis has illustrated that regulatory regimes with short-term, risk-based capital requirements encourage pro-cyclical investment behaviour.”

The idea of applying similar rules to pension schemes has been circulating in Brussels for years, since insurers compete, in certain EU countries, with pension-fund organisations for business.
However, some countries – chiefly the UK, with around £1 trillion of pensions assets, and the Netherlands, with €800bn – argue that pension schemes, unlike insurance companies, have the backing of their corporate sponsor should they find themselves in difficulty. Last year, UK pensions minister Steve Webb made clear the government’s continuing opposition. The Confederation of British Industry has also reacted with dismay, saying it could cost UK business £500bn in further pension-fund bailouts.

Lobbyists from other countries started pushing back this year. In April, the European Commission told the new European Insurance and Occupational Pensions Authority to come up with ideas for a new set of regulatory standards for pension funds, and provided 100 articles from Solvency II as a reference point.

Eiopa will report back to the commission by December. The authority’s chairman Gabriel Bernardino has assured the pensions industry that he will not recommend that Solvency II is “copied and pasted” into any new pensions rules. A spokeswoman for Eiopa said: “The call for advice obviously includes some questions with respect to Solvency II but that does not mean Solvency II will be applied to pensions. This is what a call for advice is about: to investigate, then give advice. If we had a prefabricated answer, no call for advice would be necessary.”

Walsh of the NAPF is still hopeful that the pensions industry has time to influence the debate. He said: “Eiopa has to deliver its advice by Christmas. We hope to ensure its advice highlights some of the difficulties we have. It is still all to play for.”

Verhaegen is also in a prime position to influence the debate, as chairman of Eiopa’s consultative stakeholder panel, which takes advice from the industry.

But others warn pension funds need to get ready for tougher funding standards. Crispin Southgate, pensions consultant at Institutional Investment Advisors, said: “I don’t think there are enough people in the UK pensions industry who are fully aware of the extent to which the kind of thinking behind Solvency II should be done anyway. This is the way regulators are increasingly thinking.”