Solvency II for pensions could require UK schemes to increase funding by £600 billion (€717.9 billion) or more, a report by JP Morgan Asset Management warns.
Aiming to establish a new set of Europe-wide capital requirements and risk management standards, the review is scheduled to come into effect in January next year.
Industry bodies, including the European Insurance and Occupational Pensions Authority, have criticised the proposal.
Paul Sweeting, European head, strategy group at JP Morgan, says the implications are “tremendous” because they will place an additional burden on defined benefit pension schemes.
Large contributions on behalf of sponsors would be necessary to bring UK pension schemes in line with the requirements, he says.
“We question whether a regulatory framework that is designed for large-scale and active insurers is appropriate for application to pension schemes,” Sweeting says. “There are, though, a number of ways in which the adverse effect of the proposals on the schemes can be mitigated.”
He says allowing for an illiquidity premium in the valuation of liabilities could significantly reduce the impact of new funding rules.
According to Sweeting’s calculations, for every 100 basis points added to the liability discount rate, the aggregate deficit would fall by around £200 billion.
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