Solvency II rules could increase pension liabilities by 50%, survey says

EUROPE - The introduction of Solvency II-based accounting rules in a revised IORP Directive could increase FTSE 100 companies' pensions liabilities by as much as £2.5bn (€3bn), according to Deloitte.

Three-quarters of respondents to the company's recent survey on the controversial subject believe the introduction of Solvency II measures would increase gross liabilities by 20-50%.

Deloitte estimated that, for the average FTSE 100 company, the implementation of Solvency II-type rules would equate with an increase in liabilities of £1bn-2.5bn.

Feargus Mitchell, head of Deloitte's actuarial and pension services practice, said: "Almost without exception, respondents are critical of the proposals. They believe that, given the current climate, when pension deficits are already high and the economic outlook is uncertain, now is not the time to introduce new obligations that will incur further expenses and increase deficits.

"The proposal will be one more factor that will accelerate the decline of defined benefit pensions in the UK."

In a speech at the House of Commons in London, Matti Leppälä, secretary general at the European Federation for Retirement Provision (EFRP), took pains to point out the impact a risk-free interest rate used as discount rate - as set out in the Solvency II framework - would have on pension schemes.

"According to Solvency II, a risk-free interest rate should be used as discount rate in order to determine the value of the best estimate of liabilities," he said. 

"Currently, this kind of discount rate is used in only five member states. In other member states, IORPs are currently obliged to value their liabilities according to a fixed discount rate or a discount rate that is based on the expected return on assets."

Leppälä said the impact of a transition to a different discount rate could be "enormous".

"For an IORP that currently has to discount its liabilities according to a fixed-interest rate of 4%, a transition to a risk-free interest rate (currently around 2.6%) would imply an increase in the value of the liabilities of more than 20%," he said.