The Prudential Regulation Authority (PRA) has released a consultation paper (CP) in which it implies that capital calculations for UK insurers assessing pension scheme risk under Solvency II could be based on IAS19 figures. If implemented, this could mean significantly lower capital requirements for many insurers.
In reaction to the CP, ‘Solvency II: further measures for implementation’, which was released on Friday (21 November) Alex Waite, partner at LCP, said: “This is a useful and readable statement from the PRA.
“It potentially changes the nature of the calculations required by the PRA for insurers assessing risk under Solvency II, with increased focus on accounting figures, rather than sponsors’ contributions. This would have a significant impact on the measurement of pension risk for insurers.”
He added: “However, for some insurers, the calculations might come ‘full circle’, as the little-understood asset limit rules under IAS19 may link the calculation back to scheme funding rules, depending on the pension scheme’s circumstances.”
Gordon Watchorn, partner at LCP, commented “This is the first time that the PRA has said the capital calculations could be based on the IAS19 assumptions. As well as lowering capital requirements, this could have other implications: for example in relation to the long-term investment strategy of insurers’ DB pension schemes.
“Further, it means that the guidance from the PRA for insurers differs to that for banks, and it will be interesting to see how this develops as it could be argued that the banking guidance is more prudent, being based on the scheme funding assumptions.”
The PRA is required to transpose the Directive by Tuesday 31 March next year, and the Solvency II regime will apply to all affected firms from 1 January 2016.