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New Accounting Rules worry European Pensions

LONDON, May 6 (Reuters) – European companies might need to pump billions more euros into their pension funds to meet proposed new accounting rules, Allianz Global Investors said on Tuesday.

The implementation of Solvency II rules “could be the final nail in the coffin for defined benefit schemes” Brigitte Miksa, head of Allianz Global Investor's international pensions unit, told journalists at a meeting in London.

Funding for some schemes could have to rise by as much as 65 to 70 percent if pension schemes are subject to new regulations, analysis by Allianz showed.

Schemes may be forced to slash the amount of equities they hold and drop alternative investments, such as private equity and hedge funds, to try to reduce their funding gap under the new rules, Allianz said, as Solvency II would require schemes to hold more capital against riskier investments.

This would reduce investment returns and place a greater pressure on firms to make up the gap to meet pension promises made to employees.

Many more companies may simply shut their defined-benefit pensions schemes in favour of defined-contribution schemes, where members bear all the investment risks, Allianz warned.

Under Solvency II rules pension liabilities would be estimated more conservatively than under the existing International Accounting Standards.

Schemes would also need to add in a capital buffer to guard against shocks such as rapidly increasing longevity or plummeting equity markets. 

European regulators are considering whether to include pension schemes under the new Solvency II rules that are being drafted for insurance companies. A decision on whether to apply them to pension schemes is due to be made later this year.

But implementing these regulations to pension schemes could be very difficult, as funding rules and regulatory treatment vary widely between countries, said Juan Yermo, a principal administrator in the financial affairs division of the Organisation of Economic Cooperation and Development.

“It doesn't look feasible because of the differences across countries,” Yermo told the meeting. But, he said in the future it was conceivable that there could be some shared principles between member states, which could represent a “much more diluted version of Solvency II” Yermo said.

By Simon Challis (Editing by Elaine Hardcastle)