Issue: June - Aug 2013
EXPERT OPINION

Say it again, SAM

Rowan Burger, head of alternative products at Momentum Employee Benefits, discuss how the new solvency requirements will affect pension funds.

Solvency II and SAM will become buzz words over the next few years. Hopefully, there will be some positive spillover into how pension funds are managed.

The financial services industry is adept at creating jargon to scare the common person away from understanding its core practices. Solvency II is a proposed set of European Union rules that will govern the amount of capital their life insurers must hold and the way they manage their underlying risks. The local SA equivalent of Solvency II is known as SAM (Solvency Assessment & Management), to be fully implemented in 2016.

In effect, it’s by taking risks that the insurance companies are able to make money. As retirement-fund trustees often employ insurance policies to provide fund members with death and disability benefits, or even use policies to pool their investments, this new and more scientific approach is relevant. The idea is to:

  • Reduce the risk that an insurer would be unable to meet claims;
  • Provide an early warning to supervisors so that they can intervene promptly if capital falls below the required level;
  • Promote confidence in the financial stability of the insurance sector.

It is not only the amount of capital that needs to be held to ensure policyholder promises are honoured, but the way in which insurers have to be managed is also important. The SAM regulations have three pillars:

  • Pillar 1 comprises the quantitative requirements (the amount of capital required to demonstrate solvency);
  • Pillar 2 sets out requirements for the governance and risk management of insurers, as well as for the effective supervision of insurers;
  • Pillar 3 focuses on disclosure and transparency requirements.


Burger . . . better all round

The intended outcome is for insurers not only to better placed to meet claims but also better managed and therefore more capable of doing so.

Pension funds, particularly defined-benefit ones, are like mini-insurance companies. It is for these reasons that many argue that the SAM provisions should apply here too. In Europe this is becoming highly politicised. Many funds have not weathered the global financial crisis at all well. Their struggling employers are hardly comfortably placed to ensure that these funds can deliver their promised benefits.

In a recent Financial Times report, it was estimated that standardizing some of the optimistic assumptions in UK pension funds would widen the collective deficit by €613bn (R7,3 trillion). If the equivalent solvency margins applied, this buffer adds a further €234bn (R2,8 trillion). With the cumulative effect being five times the estimated size of the SA pensions market, one can understand the reluctance to apply rules similar to those in the UK.The good news is that it is unlikely to have as significant an impact as most SA valuation assumptions are broadly standardised following the Financial Services Board’s circular 117.

Many SA pension valuators follow a similar line of thinking, hoping to provide seemingly cheaper pensions from within funds. The reserves set aside to provide a pension promise cannot be radically different if calculated by a pension actuary and another by a life insurance actuary. This would lead life insurers to provide pensions from within funds with little protection to retirees should things go wrong.

It is hoped that the disciplines learnt in managing risk for insurers will be applied to individual members saving for their retirement (Pillar 2), and that the effective communication of these risks (Pillar 3) will improve the retirement outcomes for all South Africans in pension funds.

Actuarial Society of SA chief executive Mike McDougall has pointed out that the new regime is unlikely to prevent all insurers from going insolvent, but it should prevent sudden nasty surprises.


www.momentum.co.za/investments