25 November 2012

FT: Worrying noises coming from EU

Mr Webb, the minister for pensions, was criticising the European Commission’s “wrongheaded” proposals to extend a Solvency II-type regime from insurers to defined benefit occupational pension schemes which, if enacted, could force schemes to increase their funding ratios, bringing them more into line with the solvency cushions insurance companies have to abide by.

TPR’s mid-point estimate is that a Solvency II-type regime would increase the UK’s aggregate funding shortfall by £150bn, although it said this figure could be as much as £400bn. To put this into context, UK pension schemes are currently receiving deficit contributions of £15bn to £20bn a year.

Gabriel Bernardino, chairman of the Frankfurt-based European Insurance and Occupational Pensions Authority, which is piloting the project on behalf of the Commission, tells FTfm he understands the sensitivity of the issue in the UK, and that pension funds would not have to meet any new standards overnight. But still worries remain. Indeed, if EIOPA gets its way, we may be hearing a lot more about it. Last week Mr Bernardino made a power grab by arguing that its remit should be extended to cover so-called “third pillar” private pension schemes.

Mr Bernardino also aimed a shot across the bows of insurers (and potentially others such as pure asset managers) that are increasingly stepping into the shoes of banks and lending money to finance real estate, infrastructure and the corporate sector in general. “If insurance groups heavily develop their business into non-traditional or non-insurance activities, then they should expect to be treated in relation to those businesses as if they were banks”, Mr Bernardino told an audience in Frankfurt.

The slow but steady progress by asset managers and insurers to take up some of the slack by lending to the productive economy is surely part of the solution. And if politicians and regulators do not want banks to be “too big to fail”, then we need more lenders, not fewer.

Mr Bernardino says his fear is of insurers increasing systemic risk and effectively becoming “shadow banks” by expanding their involvement in “maturity transformation” and the provision of leverage.

Shadow banks are, of course, the great bogeymen of regulators at present, as any money market fund manager will attest. But any legislation that chokes off this new supply of credit, no matter how intellectually coherent, simply has to be detrimental to society at this point in history.

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