"Directive 2009/138/EC of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)" has caused a significant stir in the pensions industry, and for good reason.

The Solvency II Directive will introduce economic risk-based solvency requirements for insurance and reinsurance companies across Member States. It will essentially require them to hold more capital in order to instil more stability. The EC has proposed changes to the Solvency II regime, to take account of the Lisbon Treaty, with a new directive known as Omnibus II. The Omnibus II Directive will set the date of entry into force of the Solvency II regime as well as the scope for the technical standards to be drafted by the European Insurance and Occupational Pensions Authority (EIOPA)*.

* EIOPA is an independent advisory body to the European Parliament, the Council of the European Union and the European Commission.

Consternation exists at the prospect of UK pensions being included in this definition of insurance and so fall under the remit of Solvency II. The potential impact on the funding requirements placed on defined benefits schemes would be monumental. This is one challenge which has united the industry, employers and all political parties in opposing any such thing. The CBI, for example, in October came out strongly:

"Imposing a Solvency II regime on pensions will double technical provision levels. That could mean half a trillion pounds taken from business investment funds in sponsor companies. It would hammer growth and job creation."

Actuaries have noted the potential for adding to the significant burden already looming from the introduction of the IAS19 accounting standard.

The NAPF, representing a large number of the UK pension schemes under threat from Solvency II, continues to vigorously oppose the proposals, noting that:

"These plans would ramp costs up dramatically."

Speaking at the NAPF 2011 Annual Conference, European Commissioner for Employment, Social Affairs and Inclusion, Laszlo Andor, sought to allay fears by stating that the EC "knows the difference" between insurance and pensions. EIOPA - currently conducting its second (517 page) consultation on changes to Directive 2003/41/EC (the IORP Directive) (see Aries article) - has refused to rule out at least partial application of Solvency II to UK pensions.

EIOPA is favouring a 'holistic balance sheet' approach as an alternative to Solvency II, which would require a value to be placed on the sponsoring employer's covenant and the Pension Protection Fund's (PPF) underlying support* for eligible schemes.

* Aries comment: interesting, in the light of the 2009 case Independent Trustee Services Ltd v Hope, Board of PPF & Slater (Ilford Pension Scheme). Here, the High Court ruled that trustees cannot rely on the PPF's safety net when taking decisions.

It is not entirely clear what is to be included under this term 'holistic balance'. However, the aftermath of adopting such an approach, whilst not likely to be as extreme as adoption of Solvency II, would almost certainly still be a significant burden on UK pensions, already buckling under pressure from various quarters.

The condoc itself, notoriously long at 517 pages, includes 96 questions. Among the most important, perhaps, is no. 12 on page 85:

"What is the view of the stakeholders on the holistic balance sheet proposal? Do stakeholders think that the distinction between Article 17(1) IORPs, 17(3) IORPs and sponsor-backed IORPs should be retained or removed?"

The answer from the UK to the second part should be a definite 'yes'. Responses must be submitted on the official template.

The EIOPA consultation ends on 2 January 2012, whilst Solvency II will be in force for insurers some time in early 2014 (originally scheduled for 31 October 2012). The ABI has a Solvency II webpage and has published a timeline and a summary of the 'Next Steps' 2010-2015.

Meanwhile, HM Treasury, recognising the inevitability that at least the policy set out in Directive 2009/138/EC, and the legislation will have to be transposed into UK law, has launched a consultation on how it intends to implement the Directive, in order to give UK insurance and reinsurance undertakings as much certainty and clarity as possible. This consultation ends on 15 February 2012 - before Omnibus II is adopted. Key documents which are all part of the consultation are the 110-page condoc itself, the Impact Assessment and Draft Regs.

Test Achats Consultation

In March 2011, the European Court of Justice ruled in Case C-236/09 Association belge des Consommateurs Test-Achats ASBL and others v Conseil des ministres ("Test-Achats") that from 21 December 2012, it will be unlawful to use gender as a differentiator in insurance and other financial products. In June, the Government clarified its view that the ruling applies only to new contracts entered into after 21 December 2012.

With less than a year to go before we see the practical effects* of this verdict, HM Treasury has launched a consultation seeking views on the key issues arising from the judgment. HMT also took the opportunity to reiterate that the Government believes that the implications are detrimental for consumers, but there is an obligation to implement it into law.

* Among other generally adverse effects, it is likely to accelerate the decline in male annuity rates, with females unlikely to see much improvement.

The consultation closes on 29 February 2012.

Update 4 January 2012

The European Commission has adopted guidelines to help the insurance industry implement unisex pricing. An official press release notes that the Guidelines confirm the ruling applies only to new contracts, in particular to contracts concluded as from 21 December 2012. They also give specific examples of what is considered a "new contract" to ensure a comprehensive application of the unisex rule at EU level from the same date.

In addition, the guidelines provide examples of gender-related insurance practices which are compatible with the principle of unisex premiums and benefits, and therefore will not change because of the Test-Achats ruling.

It remains possible for insurers to use marketing and advertising to influence their portfolio mix e.g. by targeting advertising at either men or women. However, insurers may not refuse access to a specific product because of a person’s sex, unless justified by a legitimate aim and the means of achieving that aim are appropriate and necessary.

The Commission considers that the Test-Achats ruling has no legal implications for Article 9(1) (h) of Directive 2006/54/EC which allows occupational pension schemes to set different levels of benefits for men and women when justified by actuarial calculation factors.

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