10 May 2006

IPE: German pension funds face Solvency II regime

Financial services regulator BaFin says it wants to apply parts of the Solvency II insurance regime to certain German pension funds, regardless of whether a future EU directive requires this or not.

The Solvency II regime, which sets new capital adequacy requirements for insurance companies, is to take effect from 2010.

In the debate over the EU directive for Solvency II, Germany’s BaFin and its Danish counterpart are among the EU regulators that back the idea of applying the regime to pension funds.

But Thomas Steffen, chief executive director of insurance supervision at BaFin, said the view by no means commanded a majority on the EU level. “The views on Solvency II for pension funds are split down the middle between those who back the idea and those who don’t,” Steffen said.

“As a result, we’ve decided to postpone further debate on the issue until an EU directive on Solvency II emerges, which won’t be after 2007,” he told journalists at BaFin’s annual news conference in Bonn.

Steffen also said that regardless of what happens with Solvency II, “we would like to apply certain qualitative aspects of the regime to pension funds in Germany”.

“What I mean by this is applying minimum requirements for risk management. They will be asked to identify, monitor and control risks,” Steffen told IPE on the sidelines of the conference. He added that the BaFin would discuss its proposals with the German finance ministry.

Separately, the BaFin reported that of the 160-odd German Pensionskassen (traditional pension funds), 11 did not successfully pass stress tests – which determine their ability to handle risk – in 2005.

Yet Steffen noted that only smaller Pensionskassen had failed the tests, adding that the BaFin had given them one to two years to improve their risk budgets.

BaFin has three stress tests. Test ‘R-10’ envisions a 10% drop in bond prices, while ‘A-25’ test assumes a 25% plunge in equity prices. The third and most stringent test, ‘RA 25’, envisions a 20% drop in equity prices and a 5% drop in bond prices. Since March, the regulator has introduced direct real estate investments into the tests.

BaFin president Jochen Sanio also said the regulator was giving the Pensionskassen which failed the tests special attention to “help them improve their ability to handle risk through individual measures”.

See also Speech of Mr Sanjo at BaFin’s annual news conference (German only)

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