Leading pension annuity providers are calling for a rethink of sweeping new EU solvency rules that could force them to hold billions of pounds of extra capital and make them cut annuity payouts to pensioners.
One annuity provider has calculated that under Solvency II, new European rules, due by 2012, (aiming to match the capital insurers hold much more closely to the financial risks they actually face), it would have to hold 20% more capital to back pension annuities. Potentially, this could equate to a 20% reduction in pension payouts for the owners of annuity contracts.
Companies that are writers of pension annuity contracts hold corporate bonds so that they can meet the pension payments promised. However, the recent financial turmoil has driven down the prices of many corporate bonds, highlighting the problems for annuity providers.
If we have extreme market movements, life assurers’ capital could fall very quickly to the level where regulators begin to intervene, for example by potentially preventing them from writing new business.
Some experts state that Solvency II needs to be rigorously reviewed. It needs to ensure that it not only provides an accurate picture of a company’s trading performance for analysts and the market at large, but that the guidelines are actually flexible enough to withstand changing stockmarket conditions, such as those we are witnessing.
Mark Wood, of Paternoster, which takes on the assets and liabilities of mature occupational pension schemes, has called for pension annuities to be excluded from the Solvency II framework. A ‘logical solution’, he stated.
Prudential, another leading annuity writer in the UK, is also known to be concerned about the direction of Solvency II.