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The recent consultation on the proposed extension of the Solvency II insurance regulatory Directive to pensions has thrust the issue of the relative efficiencies of differing forms of pension provision design into the limelight. There are material differences in efficiency of pension production arising from the myriad of variants in coverage and structure that exist. Inexplicably, this proposed attempt to apply a common regime to insurance and occupational arrangements fails to consider this aspect, which should be the central concern of national and international policymakers.
It is also notable that the prudential regulation of funded DB is remarkably costly. As currently practised and proposed, it even introduces an entirely spurious source of risk, interest rates. However, the principal source of expense is the focus upon scheme funding. This is misguided in that this risk is conditioned on sponsor insolvency and only strictly relevant after that event.
This distinction is also very relevant for the European Commission's consultation – for insurance companies, regulation operating on assets and imposing solvency capital requirements is operating on the insurer's likelihood of insolvency, while for pension schemes it operates on the consequence and increases the primary, unconditional risk of the employer sponsor's likelihood of insolvency. The relative inefficiency of the proposed approach will have costs for the shareholders of sponsor employers that are greater than for the shareholders of insurance companies.
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