UK's FSA Confirms Delay of Solvency II for Insurers

The Financial Services Authority (FSA) has asserted that the introduction of Solvency II rules in the UK for insurers will be delayed an extra year.

(October 5, 2011) — The Financial Services Authority has announced that insurers have been given another year to become compliant with Solvency II.

According to the regulator, the date that UK firms will be forced to comply with is January 2014 as opposed to 2013. “We have developed an approach that balances what we need to do to discharge our regulatory obligations and bring in the new regime with the needs of the industry,” the FSA said in a statement.

Some UK insurers had lobbied for the FSA to stand by its original timeframe for the implementation of the rules. They had argued that delaying the introduction would result in additional costs for insurers by forcing them to operate their old models alongside new systems, and thus, they called for a 2013 implementation date.

“This delay poses some specific challenges to the UK market since the current…regime would require firms to run a (Solvency I) internal model in 2013,” Association of British Insurers (ABI) chief executive Otto Thoresen told CityWire.

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“Today’s FSA announcement is helpful as it removes some of the distracting debate and formally assumes a year’s delay in implementation to 2014,” Jim Bichard, insurance partner at PricewaterhouseCoopers in London, told Risk.net. “Despite this, insurers will be keen for more detail from the FSA on the practical implications of complying with two parallel regimes in 2013.” He added: “The FSA’s plan to extend the internal model approval process…by over a year is likely to be met by disappointment from many of the largest insurers, especially those pushed to the back of the queue, when they have committed time and resources, including their best people, to progressing for a mid-2012 delivery.”

Meanwhile, some industry observers have suggested that Solvency II will ultimately be extended to cover defined benefit pension schemes. The response to this suggestion has largely been negative. Last month, the Confederation of British Industry (CBI) warned that Solvency II 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.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(October 5, 2011) — The aggregate deficit of S&P 1500 pension plans increased by $134 billion in September, hitting a “post-World War II high, according to a recent analysis by Mercer.

Mercer showed the aggregate deficit in pension plans sponsored by S&P 1500 companies increased from a deficit of approximately $378 billion as of August 31, 2011, to $512 billion as of September 30.

“The end of September marks the largest deficit since we have been tracking this information,” said Mercer retirement risk and finance partner Jonathan Barry in a statement. “Over the past three months, we have seen nearly $300 billion of funded status erode. This will have significant consequences for plan sponsors. It will be particularly painful for organizations with September 30 fiscal and/or plan year ends.”

According to the consulting firm, the drop in funding ratio was fueled by a 7% drop in equities and a fall in the price of high-quality corporate bonds throughout the month. While discount rates for the typical US pension plan decreased approximately 30-40 basis points during the month, the funding status of S&P 1500 pension plans peaked at 88% at the end of April and has since declined by 16%.

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Mercer’s research showed the aggregate funding ratio dropped to 72% from 79% where it stood at the end of August and from 81% since the start of the year.

Kevin Armant, a principal with Mercer’s financial strategy group, added: “The recent market turmoil is a reminder to plan sponsors of the need for a pension risk management strategy that is aligned with corporate objectives…Those that were aware of the risks and can deal with the increased cash funding and P&L charges associated with the current market downturn may choose to stay the course. Those that can’t will continue to evaluate risk reduction opportunities, including increasing interest rate hedging programs, moving more into long corporate bond allocations or transferring risk through the introduction of a lump sum payment option or purchasing annuities.”

As of the end of September, S&P 1500 pension plan assets totaled $1.31 trillion, while liabilities were at $1.83 trillion, Mercer said.

Last month, figures from Mercer showed that August was a dismal month for US pension plan funding levels, which could have potential ramifications for 2012 financials. Nevertheless, Mercer noted that the lackluster news was not unexpected. “For the typical pension plan invested 60% in equities and 40% in aggregate fixed income, the monthly volatility of funded status is between 3% and 4%. The decline in August shouldn’t be seen as an outlier and there is the potential for even more volatility prior to the end of the year,” Armant said.

A recent analysis by Credit Suisse painted a similarly negative picture. The analysis showed a combined $400 billion pension deficit for S&P 500 companies.

The 326 companies within the S&P 500 that have defined benefit pension plans face a total of $388 billion in pension deficits, according to an analysis from the bulge-bracket bank – a number equal to a 77% funding ratio on average. This compares with a $326 billion deficit and 79% funding levels at the end of 2008. This bleak picture is likely the result of low interest rates – which directly influence corporate pension liability calculation under the Pension Protection Act of 2006 – and meager equity markets. “If you think about the typical corporate pension plan, they are continuing to take two big bets: they are betting on interest rates and they are betting on the equity market – and they hope that both go up,” David Zion, head of accounting research for Credit Suisse, told the Financial Times.

Credit Suisse estimated in its report that each 25 basis-point decline in interest rates increases pension liabilities at S&P 500 companies by upwards of $45 billion. With interest rates at all-time lows – having dropped 50 basis points this year – pensions have been caught in a perfect storm of falling assets and rising liabilities.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742