Thought leaders: Academic insights: All eyes are on Brussels and Frankfurt

Pensions have moved up the European Union’s agenda, says James Walsh

If there is one prediction we can make with confidence at the start of 2011, it is that we can expect to hear more from the European Union (EU) about pensions.

Strictly speaking, the EU has no power to get directly involved in pensions. Or, as euro-jargon puts it, there is no pensions-related competence in the EU treaties.

But as sectors such as the chemicals industry have found out, the EU’s central remit – the creation of a single market with free movement of people, goods, services and capital – provides cover for policy initiatives in almost any field you care to mention, and pensions are no exception.

In fact, we already have a substantial body of EU law on pensions. The 2003 Directive on institutions for occupational retirement provision (the IORP directive, in Brussels-speak) sets out a broad framework for pensions regulation and supervision with a view to strengthening the internal market.

The year 2011, however, will see a step-change in EU policy-making on pensions.

First, we have a powerful new EU supervisory body. Based in Frankfurt, the European Insurance and Occupational Pensions Authority (EIOPA) was launched on 1 January and has three to four times as many staff as its predecessor. EIOPA is likely to become a key player in pensions policy very soon.

The second key development, and one that is high on our watch list at the National Association of Pension Funds (NAPF), is the European Commission’s green paper on pensions. Published last July, this represents a high-profile intervention into almost every aspect of pensions policy, with no fewer than three European commissioners putting their names to the project. The adequacy of state pensions, the risk exposure of members in defined contribution (DC) schemes and the challenges of greater longevity are among the issues the green paper explores.

However, our key concern is the prospect of a new funding regime for defined benefit (DB) pension schemes that would be an equivalent of the insurance industry’s Solvency II rules. Solvency II requires insurance companies to
hold higher levels of capital to guard against unforeseen economic shocks. The argument is that occupational pension schemes should have something similar to strengthen the protection of workers’ pension benefits.

The NAPF agrees up to a point – the EU might well be able to play a role in improving the protection of pensions. But this will require an approach quite distinct from the Solvency II solution adopted for insurance companies.

Unlike insurance companies, pension schemes meet their liabilities over the long term and in a reasonably predictable way.

And there is no case for adding further levels of regulation on top of the very robust framework we already have in the UK, where members’ benefits are already strongly protected by their employer’s support for the scheme and by the work of the Pensions Regulator. We also have the Pension Protection Fund, which provides 90% compensation (for all employees, bar higher earners) if the sponsoring company goes bust.

Introducing an extra solvency buffer for DB pension schemes – in addition to existing funding requirements – would inevitably force more employers to reduce or cease providing pension benefits to their employees, resulting in less generous benefits for scheme members.

So although a Solvency II-style regime might – in theory, at least – strengthen security, it would undermine adequacy, which is contrary to one of the objectives of the green paper. One thing is certain, however – pensions
have been pushed firmly up the EU agenda, and are likely to stay there.

James Walsh is senior policy adviser: workplace pensions at the National Association of Pension Funds

References

Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision, Brussels

Towards adequate, sustainable and safe European pension systems,
green paper, European Commission, July 2010, Brussels

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