Final Solvency II Proposals Could Directly Impact the UK Pensions Market and Wider Macro Economy
A KPMG report, Evolving Insurance Regulation, highlights concerns that the final Solvency II proposals could negatively affect the pensions market and wider economy in some European countries.
The final requirements on the matching premium and counter-cyclical premium – which determine the way insurers’ liabilities are calculated – are the two issues KPMG believes will have the greatest impact on European firms’ capital requirements and consequently the annuities market.
Phil Smart, UK head of Solvency II at KPMG, commented: “In the UK, this could mean that the return on annuities falls to a level which consumers find unacceptable. Insurance firms may then decide such business is uneconomical. This in turn would be unwelcome news for pensioners, who could be forced to accept the investment risk on their pensions savings, as insurers will increasingly be expected to offer unit linked pension products.”
Commenting on the broader impacts on the macro economy, given insurers are key players in the bond market, Phil Smart continued: “Many European insurers have been significant investors in infrastructure and real estate funds, which provide reliable and stable cash flows, consequently providing a good match to the cash outflows on annuity type products. By imposing high capital charges on these investment classes for regulatory purposes, the risk-adjusted returns may become unattractive and insurers needing additional solvency will likely choose to change their investment portfolios. This could potentially lead to new funds for investment drying up, which could impact the wider European growth agenda.
“In addition, unless the capital charges basis applied to asset classes is changed, many insurers may look to move out of long-term corporate debt into lower risk, and lower return, investments. Overall, the knock-on effect to the wider economy cannot be underestimated.”
Phil Smart concluded: “Re-examination of the European Commission’s proposals on charges on investment products, combined with another quantitative impact assessment, would be prudent.”