A Solvency II approach to pensions could require UK schemes to increase funding by £600bn or more, according to analysis by J.P. Morgan Asset Management.
In the firm's response to the European Insurance and Occupational Pensions Authority's (EIOPA) consultation, which closed on 2 January, Paul Sweeting, European head of J.P. Morgan's Strategy Group, said the approach would "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."
J.P. Morgan's response also concluded 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, there may be 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)
* The increased governance and reporting requirements will place an additional financial burden on DB pension scheme.
Professor Sweeting questioned whether a regulatory framework designed for large-scale and active insurers is appropriate for application to pension schemes, but said that there were a number of ways in which the adverse effect on schemes could be mitigated.
"Allowing for an illiquidity premium in the valuation of liabilities could significantly reduce the impact of new funding rules," he said. "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."