Solvency II Is a Bad Idea, British Industry Group Warns

(September 28, 2011) — The Confederation of British Industry (CBI) has warned that Solvency II — a new set of capital requirements — is a terrible idea for the business and economy of the United Kingdom.

“We need the UK government to step up to the plate in Brussels and stop the imposition of insurance-style solvency standards on DB pension liabilities. The government can do a lot more than it has to date,” CBI chief policy director Katja Hall said in a statement.  

Hall continued: “This issue affects all businesses with DB liabilities, whether or not they have closed the scheme. The proposal is a terrible idea, based on a wrong-headed insistence that defined benefit schemes are the same as insurance contracts. The potential effects are very significant, and would massively undermine the government’s economic goals.”

CBI estimated that schemes that comply with Solvency II would need to sell equity worth over £800 billion. “With the volatility that we have seen in international money markets, pension funds piling into more secure government bonds would push down yields and create even more pressure on sponsors as investments fail to deliver,” the release stated.

In contrast, Hector Sants, CEO of the Financial Services Authority in the UK, has previously described Solvency II as “facilitating a step change in the solvency and risk management of insurance firms in a consistent and transparent way across Europe.” The main effect that the new policy will have on the insurance industry is increased capital requirements, he noted.

Although Solvency II is not set to be implemented until 2014, its effect on pricing may be felt well before that date, according to a recent KPMG study, which found that a record £3 billion ($4.9 billion) of pension liabilities were transferred to the insurance market through pension buy-ins over the past 12 months.

A major factor that has driven the increase in buy-ins in the past year has been the impending implementation of the Solvency II. As a result, companies pursuing a buy-in as a de-risking option will look to act quickly to take advantage of the favorable market.