Proposals for new Europe-wide rules for calculating pension deficits could add £150 billion to funding targets for UK defined benefit pension schemes, according to analysis by the European Insurance and Occupational Pensions Authority (EIOPA).
Its Quantitative impact study on institutions for occupational retirement provision (Iorps): preliminary results for the European Commission, found that, using one set of assumptions about how calculations under a revised pensions directive could be made, UK pension deficits would have been €527 billion (approximately £449 billion at current exchange rate) at the end of 2011, compared with an estimated €350 billion (£229 billion) under current funding rules.
EIOPA’s proposals include the application of a Solvency II-type capital regime to assess the solvency of pension funds.
Under the system, which has been designed for insurance firms, pension funds would be required to increase funding levels, making the provision of pensions more expensive.
Steve Webb, minister for pensions, said: “The EU’s [European Union’s] latest figures show the extremely high cost its plans would place on UK defined benefit pension schemes.
“In fact, its estimate of a baseline £450 billion cost is in line with the worst-case scenario contained in figures The Pensions Regulator produced for the UK government last year.
“This confirms that any such new rules would harm organisations’ ability to invest, grow and create jobs, and many more schemes could be forced to close. I continue to urge the commission to abandon these reckless plans.”
Joanne Segars, chief executive at the National Association of Pension Funds (NAPF), added: “The EU plans for UK pensions come with a clear and unpalatable price tag.
“Organisations trying to run final salary pensions could be faced with bigger pensions bills to plug an astonishing £450-billion funding gap. This would have a highly damaging effect for the retirement prospects of millions of UK workers.
“This project has been conducted at breakneck speed due to the commission’s ludicrously tight timetable. This cannot be the basis for formulating a policy that could undermine the retirement plans of millions of people both in the UK and across Europe.”
Mark Dowsey, a senior consultant at Towers Watson, said: “These results only estimate what new EU-wide rules might do to measured pension deficits.
“Much of the impact would depend on what had to be done in response and within what timeframe.
“Regulators in the UK and other European countries appear to be warning the European authorities against producing directives in haste and repenting at leisure.
“If the commission embarks on a race against the clock to get a directive nailed down before commissioners change jobs next year, there will almost certainly be important details that have not been thought through.”
EIOPA intends to publish its final report in mid-2013.
