CEIOPS Solvency II guidelines now coming out could significantly reduce pension annuity rates, according to industry experts. Just recently, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) released 24 consultation papers setting out their draft advice on a wide range of important issues governing the detailed implementation requirements of the new Solvency II regulatory framework for insurance companies.
The advice included their view that the discount rate that should be used in valuing insurance liabilities should be based on the European Central Bank (ECB) AAA government bond yield curve. But Watson Wyatt, leading industry consultants, said there was no formal advice actually set out on the controversial issue of the “illiquidity premium” that might be used in the calculation of illiquid liabilities, such as pensions in payment (annuities), at a higher discount rate, and the paper made clear the majority of CEIOPS members did not back such an approach. It said the lack of such a premium would have “far reaching” ramifications for insurance companies as it would increase the cost of providing pension annuities.
Watson Wyatt’s global head of risk & value services for life insurance companies, Mark Chaplin said that if further lobbying by the UK insurance industry as a whole, the Actuarial Profession, the Financial Services Authority (FSA) and the government on this issue proves to be unsuccessful then the social policy implications could be really serious and the demise of the compulsory purchase annuity (CPA) in its current form may be imminent.
The UK annuity industry has been lobbying for quite a while as to the use of a liquidity premium in valuing reserves and its absence from this far reaching consultation paper is likely to re-energise the debate. Let’s just hope it is not to noticeable when you eventually start looking for annuity quotes and the best annuity rates for your circumstances.
