Currently, occupational pension schemes do not have to comply with the solvency requirements applicable to life insurers. However, there are rumblings in Europe of the possibility that occupational pensions may be brought into the scope of these requirements in the future.

According to Wragge & Co LLP pensions partner Jason Coates, this could have a devastating impact on UK companies with large defined benefit schemes. They could be asked to reserve for pensions liabilities on their balance sheets to “back” equity investment in their schemes.

Coates explains: “The insurance solvency requirements do not apply to occupational pension schemes. Instead, defined benefit schemes must fulfil new scheme funding requirements the UK has implemented in a way which does not refer to insurance type provisions. This position may be challenged as a result of lobbying from a number of European regulators, which regulate both insurance and pensions industries, as part of the Commission’s consultation on the new insurance directives.”

The EU Commission is undertaking a fundamental review of the directives affecting life and non-life insurers and reinsurers. While the Commission expects to publish a formal framework directive in summer 2007, implementation is not expected before 2010.

Coates continues: “Traditionally, the UK has taken a different attitude to funding pension schemes to some other EU Member States. It has not stipulated the nature of the assets in which schemes can invest. Instead, schemes need to ensure that they have sufficient assets to meet liabilities. In contrast, many European jurisdictions have treated pension schemes more like insurance companies and have imposed stringent investment and funding codes.”

“The UK needs to be very wary of any hint that it will be forced into accepting insurance solvency requirements for UK pension schemes and their sponsors. At present, we understand that the Commission’s position on this is unclear. The UK Government and UK regulatory authorities need to work to safeguard the position of UK companies in this respect,” he concludes.