UK pensions face potential threat from EU law

UK occupational pensions face potential threat of closure if a new European Union (EU) law comes into effect.

The National Association of Pension Funds (NAPF) and PricewaterhouseCoopers (PWC) have warned that the review from the European Insurance and Occupational Pensions Authority (EIOPA) on the Institutions for Occupational Retirement Provision (IORP) Directive could lead to the closure of occupational pension schemes, both defined benefit (DB) and defined contribution (DC).

To enhance the security of occupational pensions across EU member states, EIOPA is proposing the application of a ‘Solvency II-type capital regime’ to assess the solvency of pension funds.

Under this system, which has been designed for insurance firms, pension funds would be required to increase their funding levels, making the provision of pensions more expensive.

According to the NAPF, businesses would have to inject at least £300 billion into their DB pension schemes if the law goes ahead, which would cause knock-on damage to the UK economy and jobs market, and would also lead to the closure of more final salary pensions in the private sector.

According to PWC, most employers would look to level down to minimum auto-enrolment requirements, to avoid the capital burdens which would go with supporting workplace pension schemes under any likely new regime.

Its estimate for the cost for UK business if the rules were implemented is up to £500 billion, depending on how much leeway there is for healthier businesses.

Raj Mody, head of PWC’s pensions group, commented: “While attempting to improve pension scheme security, these new rules could actually kill off occupational pension schemes altogether.

“The additional costs for organisations would ultimately be borne by individual savers, who would see less generous pensions, whether DB or DC. The plans would therefore work against the initiatives the UK government is planning to encourage long-term saving.”

Joanne Segars, chief executive of the NAPF, said: “The overall objective to make European pensions more secure is one which we support. But the introduction of Solvency II-type rules will have the opposite effect.

“Faced with extra funding demands, many employers will revisit their pension arrangements. And what we are likely to see is the closure of more final salary pensions.

“During these difficult economic times, Europe should focus on fostering growth and job creation. Solvency II-type rules would not only put additional pressure on companies that are struggling for survival, but would also force them to divert money away from investment and new jobs. 

“The UK pension system already provides a strong system of member protection through the employer covenant, the work of the Pensions Regulator, and the safety net provided by the Pension Protection Fund. We do not need new solvency rules for pensions.

“Any European action on pensions should focus on where it can add value across EU member states. The EU should concentrate on improving outcomes for the 60% of people without access to workplace pensions and on improving governance and communications. The EU should not try to fix a problem that does not exist.”

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