An impact study on how annuities are treated under Solvency II could lead to pension payouts being reduced by up to 20%, Deloitte claimed today.
The European Insurance and Occupational Pensions Authority is expected to launch its impact assessment next week on how long-term guarantees will be affected by the new rules for Europe's insurance industry.
During the assessment process, the regulator will test the impact of different approaches to how insurers set reserves and capital for products like annuities. According to Deloitte, inappropriate treatment of this could force insurers to hold greater reserves, raise more capital and charge more for annuities - resulting in lower pension payouts for consumers.
Tamsin Abbey, insurance partner at the consultancy, welcomed the certainty the impact study would bring, despite the 'burden' it would represent for annuity providers at a 'busy time'.
'Solvency II has been several years in the making and brings many benefits, particularly in the way insurance companies manage their risks and hold capital against them. However, one of the key stumbling blocks in the negotiations has been the treatment of annuity liabilities and the implications for customers at retirement,' she explained.
She added: 'The matching adjustment is an extremely important issue for life insurance companies and pensions savers. Depending on what the final regulations say, annuity providers might need to hold larger reserves, which could lead to them either reducing dividend payments or raising more capital. Insurers must ensure senior management understand and manage their company's risks properly. How much capital is held in the technical provisions is only one part of the equation.'
Annuity rates could fall by between 5-20%, Abbey claimed, making retirement 'a lot more expensive'.
The decision to launch an impact assessment of long-term guarantees has contributed to delays in the passage of Solvency II which mean the new rules are now not expected to come into force until after the January 2014 date originally earmarked for its implementation.