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Solvency II could slash pensions by 20% - UK insurer

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  • Solvency II could slash pensions by 20% - UK insurer

UK - Legal & General (L&G) has repeated a warning that annuity levels for UK-based defined contribution pension scheme members in the UK could fall by up to a fifth, if Solvency II is enacted in its current form.

The warning follows claims from the Association of British Insurers suggesting the European directive would force UK insurers to raise an extra £50bn (€57.16bn) in equity, leading to a sharp increase in premium rates paid by policyholders. The claims were made in a letter sent by the ABI to Alistair Darling, chancellor of the exchequer, urging both him and the European Commission to intervene.

Tim Breedon, chief executive of L&G, last month claimed the rules were "a betrayal of savers", and said retirement income from annuities could be slashed by a fifth as insurers are forced to increase capital reserves.

Phil Naylor, individual annuity director, L&G, has now re-emphasised the scale of the enforced reduction in UK annuity rates if the rules come into force as they stand, by arguing UK consumers will be penalised more than some of their European counterparts.

L&G carried out a comparison between insurance companies' expected long-term investment returns as calculated on actual portfolios, and the investment returns which could be expected if insurers assumed risk-free returns, as required under the Solvency II proposals.

It is these returns which help insurers to price their annuity products.

L&G compared the average returns from a spread of corporate bonds - UK, European and US - with returns from a spread of UK gilts, the risk-free asset class which is likely to be used within the Solvency II framework.

For the same size of pensions pot, the annuity rates which L&G would be able to pay were calculated using assumed investment returns both on the conventional and risk-free portfolios, producing a difference of up to 20% as at the end of June. The calculations were carried out for a 65-year-old man and a 60-year-old woman.

Naylor said: "British pensioners will be hit more than some of those in the rest of Europe because the UK has a more developed annuity market. In the rest of Europe, many DC schemes do not annuitise at the point of retirement."

He added: "DB schemes could also be affected if they chose to annuitise or do a buyout."

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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