Solvency II Review: Provides a golden opportunity for the de-risking market to provide greater flexibility for pension schemes and their members

Today (19 February) marks the close of HM Treasury’s Call for Evidence on Solvency II.

In its response, LCP calls for a detailed look at the rules governing buy-ins and buy-outs so that insurers can better meet the requirements of DB pension schemes and their members.

LCP highlights that the UK insurance regime is widely viewed as the “gold standard” destination for securing pension liabilities and maintaining the safety and soundness of insurers should always be the primary objective in any review, as this is the best way of ensuring members benefits are secure over the long term.

However, LCP also believes that more flexibility around product design and liability eligibility rules could provide clear benefits for both insurers and pension schemes without compromising policyholder protections.

In LCP’s response to the Solvency II Review, which closes today, some of the changes they have called for are:

• An end to the grey area around whether part of a buy-in/out premium can be deferred (eg to avoid the risk to sponsors of over-funding the DB pension scheme).
• Relaxation of the rigid restrictions on adjustments to the insured pension benefits over time (eg for historic data issues, changes in discretionary practice and augmentations of benefits).
• More flexibility for insurers to move away from their standard member option terms, particularly where the scheme wants to pay more generous terms, so that members do not see unnecessary step-changes in terms.
• More flexibility to provide surrender values for schemes seeking such features.
• More accessible public reporting on insurers’ solvency positions.

Charlie Finch, partner in LCP’s de-risking practice, said:

“We welcome the review of Solvency II as it provides a golden opportunity to make the rules for buy-ins/outs work better for insurers, pension schemes and members.

“1 in 6 pension scheme members have now been insured and we estimate that this will rise to 1 in 3 by the middle of the 2020s. This is all the more reason to iron out the wrinkles in the existing rules to ensure it continues to be an effective and vibrant marketplace. Policyholder protection should rightfully be the primary objective in any review but we think improvements can be made to the rules whilst maintaining the safety and soundness of insurers.

“The buy-in/out market works well, but there are some rigid rules under Solvency II which restrict flexibility at present. It would be a real shame to miss the opportunity to fix this. Reporting of solvency information could also be improved to aid understanding and de-mystify insurance for pension trustees and their members.”