UK government challenged over Solvency II impact

The Labour party has asked the government to detail what measures it is taking to protect UK businesses and infrastructure investment from the impact of EU Directives.

In a letter to UK Business Secretary Vince Cable and Chief Secretary to the Treasury Danny Alexander, the opposition Labour party raised concerns about the impact of European Union (EU)-wide Solvency II and the Institutions for Occupational Retirement Provision (IORP ) directive.

Labour MPs Chuka Umunna and Rachel Reeves asked “what assessment has the government made of the impact and in particular with reference to UK investment in infrastructure both in terms of the government’s plans and in the ability to unlock private investment?”

These planned regulations affect the insurance and pensions industries, and seek to establish a revised set of capital requirements and risk management standards.

The proposed Solvency II regime for insurance companies across Europe is due to come into force between 2013 and 2014. It changes requirements on capital adequacy and risk management, and will apply to all insurance firms with gross premium income exceeding €5m or gross technical provisions in excess of €25m.

Rachel Reeves MP, Labour's Shadow Chief Secretary to the Treasury, said the planned regulation must “not have the perverse consequence of hindering investment in the essential infrastructure and productive businesses that must be the foundation of our future prosperity.”

With regard to Solvency II, the proposed restrictions on the level of BBB rated bonds that insurers can hold could reduce investment in bonds issued for infrastructure projects, which are typically BBB rated.

The competitiveness of UK insurance companies outside the EU could also suffer, as overseas subsidiaries would be required to hold more capital than their locally-based competitors in countries which are not deemed to have an ‘equivalent’ solvency regime.

Of the IORP directive for occupational pensions, the letter said hundreds of billions of pounds could be diverted to “quickly plug the current deficit in provisions for defined benefit pension schemes, which is estimated by the Pension Protection Fund to be more than £300 billion (€378 million; $475 million)”.

This would take resources away from business investment, growth and job creation, the letter added.

Business organisations and trade unions in the UK have expressed similar concerns and for months have been lobbying for change.

The UK has formed a bloc opposing the new capital requirements, together with the Netherlands, Germany and Ireland, but this is not yet sufficient for a blocking minority.