Ceiops: Basel II and Solvency II can diverge on pension issue

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Moves to force banks to account for pension scheme deficits as part of their core Tier I capital will not necessarily be included in Solvency II, despite the recent push for cross-sectoral regulatory consistency, the Committee of European Insurance and Occupational Pensions Supervisors (Ceiops) has said.

The Basel Committee on Banking Supervision, which oversees international banking standards and regulations, issued a consultation paper on the Basel II New Framework in late 2009 as a response to the financial crisis.

One of the key proposals is to force banks to deduct defined benefit pension scheme deficits from banks’ core Tier I capital, to address “the concern that assets arising from pension funds may not be capable of being withdrawn and used for the protection of depositors and other creditors of a bank”.

But despite pushing for cross-sectoral consistency in other areas, such as hybrid capital (see Life & Pension Risk, October 2009), Carlos Montalvo, secretary-general of Frankfurt-
based Ceiops, which is developing Solvency II, said no decision  had been taken as to whether to extend the principle to the insurance sector.

“Cross-sector consistency is aimed at the level of principles, including [the] quality of capital [such as the] hybrid issue. No decision on extending the pensions deficit rule to insurance has been taken, nor will it necessarily have to be taken for the sake of consistency, which goes beyond the level of principles,” Montalvo said.

Life & Pension Risk contacted several major European banks for comment on the impact of the proposals, but all declined.

Bridget Gandy, a managing director in the financial institutions team at rating agency Fitch in London, downplayed the severity of the impact of the Basel Committee’s proposal on pension deficits. She said the UK and German banking sectors would be the most affected by the plan, due to the nature of their pension liabilities – defined benefit and book reserve systems, respectively – but it was “only a small part” of the overall Basel proposals.

“We are not particularly concerned [with these proposals] among everything else that is going on. It is a similar issue to the volatility of security holdings, such as the trading book, relating to a bank’s core capital,” she said. 

Gandy said under the German system, pension scheme liabilities were already accounted for on the balance sheet and so deducted from core capital, although they are subject to German generally accepted accounting principles (GAAP), rather than International Financial Reporting Standards (IFRS), which are more onerous in this regard.

“It’s not likely to be a major issue for German banks,” Gandy said. “We would doubt the German regulators will start using IFRS.”

Yet analysis by Life & Pension Risk shows the pension scheme deficits facing many UK banks may pose a considerable drain on available core Tier I capital.

At the end of the third quarter of 2009, the Edinburgh-based Royal Bank of Scotland, which is now 70% owned by the British taxpayer, recorded a pension scheme deficit of £1.442 billion, equivalent to 4.37% of the bank’s core Tier I capital.

At the same time, the bank reported a Tier I capital ratio of 5.5%, although this later rose to 11.1% as a result of joining the UK Treasury’s Asset Protection Scheme.

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