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New EU rules could damage pensions

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A new EU directive may see pensions cut by up to 20% as pension funds are forced to hold more Government bonds, research has shown.

The Solvency II rules, designed to align the treatment of insurance across Europe, could force annuity providers to hold significantly more reserves and switch from investing in corporate bonds to lower-yielding assets.

Research by Deloitte indicates that annuity rates could drop by between 5 and 20% when the new rules are launched in January 2014

This means yearly retirement payments of £5837 from a pension pot worth £100,000 could fall by between £292 and £1167.

Richard Baddon, insurance partner at Deloitte, said: “There has been a great deal of technical debate and negotiation with the EU about Solvency II.  A focus for the UK has been the treatment of the ‘Matching Adjustment’, which affects annuities and the way insurers set reserves and calculate capital. The amount that annuity rates will fall by depends on whether there is a favourable outcome to negotiations around the Matching Adjustment. In any event, insurers may need to change the way they invest their assets and may move away from corporate bonds, which give a higher return, to lower-yielding government bonds.

“Whatever the outcome of these negotiations, it is likely that insurance companies will need to charge more in future for annuities. If there is an unfavourable outcome in relation to Matching Adjustment the impact may be very significant. It is important that insurers, trade bodies, regulators and government continue to lobby hard in Europe to protect pensioners’ interests.”


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