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Solvency II: green light, or car crash?

Hugh_Savill_blog268x317There is a fine old French card game called Mille Bornes, based on a car road race. Players have to travel 1000 kilometers by playing distance cards. Sounds easy, but your opponents are trying to stop you with a dastardly array of penalty cards featuring red lights, speed limits, punctures - and a nasty-looking accident involving a street light. An unlucky player can have an accident before leaving the garage.

So Solvency II has been stuck at a red light for the last six months, while the European insurance regulators’ body EIOPA writes a report on long term products with guarantees – pensions to you and me. The report was published on Friday. What does it mean for British savers and pensioners?

The key issue for British pensioners is the Matching Adjustment. This measure reduces the capital insurers must hold now in order to pay out annuities to pensioners many years in the future. Insurers mainly invest in long-term bonds (ten years’ or more duration) to pay pensions. The Matching Adjustment works by recognising that insurers are not exposed to the short-term fluctuations in the value of bonds that they will hold till maturity. Without the Matching Adjustment, annuity values fall because the insurer is holding too much capital. .

The good news is that the EIOPA report recognises the Matching Adjustment, and shows the way forward to some minor improvements. But so far we are offered a 25 kilometer distance card, when we needed a 200 kilometer card. British pensioners need further improvements.

Can we now expect the Solvency II roadrace to accelerate away towards the chequered flag fluttering in the distance?

The European Commission must now produce a reaction to the report, and amendments to the Omnibus 2 text. The Commission intends to produce this in the next three weeks,

If this milestone is passed, then the way is open for “trilogue” negotiations to re-start. These involve the European Commission, the European Parliament and the Finance Ministries – represented by Lithuania, who hold the Presidency of the Council of Ministers this autumn.

The question is: have the regulators done enough to prevent the Finance Ministries from playing a series of penalty cards?

Last updated 29/06/2016