UK pensions to get Solvency II-style rules by 2020

Solvency II-style capital requirements for UK pensions schemes will be put in place by the European Commission before the end of the decade, industry sources said.

Two senior UK industry figures said they have been informed by high-level European policymakers a regulatory regime closely based on the three pillars of Solvency II requirements will be extended to schemes across Europe by as early as 2016 or 2019 at the latest.

One of the sources said: “There will be capital requirements for pension schemes. It is definitely coming. It’s like a super tanker on the horizon, it approaches very slowly, but once it has set upon its course it is very difficult to divert.”

The new solvency requirements will be contained in an updated pensions directive, which is currently in consul­tation.

It is feared the directive could balloon to from its current size of 12 pages up to 150 pages following the change.

The sources understand a wholesale extension of pillar 2 and pillar 3 of Solvency II, measuring qualitative risks and disclosure risks, will apply to UK pension schemes.

However, it is unclear whether pillar 1 rules, which govern the amount of capital buffers needed by an institution, will be more stringent for so-called article 17 “regulatory own funds” pension schemes than they will be for “non-regulatory own funds”.

Regulatory own funds dominate the Dutch industry but do not currently exist in the UK.

National Association of Pension Funds policy adviser James Walsh said: “It could be that article 17 funds will be subject very much to something that looks like Solvency II.

"But the call for advice suggests other pension schemes, which might well include the type of DB schemes you have in the UK, would not be subject to that.”

Walsh added the debate now centres on how UK pension funds can value the employer covenant and Pension Protection Fund on their balance sheet to ameliorate funding requirements.