14 May 2012

FN: Pensions industry fears being softened up for Solvency II

Was the UK Pensions Regulator's recent statement on funding guidance either a harsh rejection of any help for schemes to deal with the effects of quantitative easing, or does its reference to additional flexibility for employers in financial trouble represent positive news?

There is a third possibility – one that many in pensions may find alarming. Will this statement – purposefully or inadvertently – move UK scheme-funding regulation in the direction of the EU’s unpopular Solvency II-style proposals?

The language of the regulator’s statement is in many respects strikingly similar to the European authorities’ latest thinking, expressed in the advice requested, and given, by the European Insurance and Occupational Pensions Authority to the European Commission in February.

The regulator’s guidance also urges trustees to undertake contingency planning – possibly a good idea, however, also not currently a trustee duty under UK trust law or EU or UK legislation.

If the regulator’s guidance had the force of law, then it would represent a significant change to funding legislation. And it would affect the amount of capital that employers are required to set aside as security for their pension promises; either within the scheme or in escrow accounts. But, of course, it does not have force of law – yet.

But the regulator also maintains a formal code of practice on funding that sets the standard with which schemes and companies are legally required to comply. It carries the (negative) approval of the secretary of state and of Parliament – so if no politician objects, the code is binding.

This has remained unchanged since February 2006, but the regulator has said it will issue a revised code. This would be expected to accommodate the approach set out in April’s statement, and would also then come to define scheme funding standards.

If it results in a partial implementation of a Solvency II approach even before a new EU Directive, it may pave the way for more formal legislative change.

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