(April 10, 2013) – Moving to Solvency II-type rules for pensions could increase UK final salary deficits to at least £450 billion, according to the latest calculations from a leading pension authority.
The European Insurance and Occupational Pensions Authority (EIOPA) has submitted the preliminary results of its Quantitative Impact Study (QIS) on the proposed European Pensions Directive based on Solvency II-type rules to the European Commission (EC).
The study found that applying Solvency II -type rules to UK final salary schemes would increase their deficits to a collective £450 billion.
The National Association of Pension Funds (NAPF), which has been campaigning for pensions to be exempt from the rules for years, has used the new data to urge the EC to once again reconsider its proposals.
Joanne Segars, chief executive of the NAPF, warned a Solvency II-type approach would put a huge burden on the UK’s remaining final salary pension schemes and the businesses that run them.
“The EU plans for UK pensions come with a clear and unpalatable price tag. Businesses 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,” she said.
“This project has been conducted at breakneck speed due to the EC’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.”
Segars called on the EC to rethink its proposals, instead of “trying to hurry them through”.
“It would be better to focus on the 60 million EU citizens who have no workplace pension, instead of eroding the good pensions already in place,” she added.
The NAPF isn’t alone on its crusade; the Pensions Regulator has responded to the report by saying that “the analysis published today by EIOPA will assist the [European] Commission in considering whether to make a proposal and what provisions to include”.
And consultants Towers Watson also highlighted the research on Wednesday, Mark Dowsey, a senior consultant at the firm, 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.”
EIOPA’s publication warns that: “A number of aspects of the QIS were found to be very sensitive to the inputs, and further analysis is needed”, that its results “should be treated with caution” and that additional work it is now carrying out “would have to be tested in follow-up QIS exercises”.
Dowsey said: “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.”
Solvency II applies to insurance companies in the EU. The EC wants parts of it to form the centrepiece of the new Pensions Directive. Solvency II- type capital rules would increase the funding levels required for pension schemes, forcing employers to make bigger contributions.
The prospect of ballooning deficits couldn’t come at a worse time; The Pension Protection Fund (PPF) – a lifeboat for bankrupt companies’ pension schemes – released new data on Tuesday showing the aggregate deficit of the 6,316 schemes in the PPF 7800 index has increased to £236.6 billion at the end of March 2013, from a deficit of £201.5 billion at the end of February.