EU plan risks final salary pension deals
EUROPEAN plans aimed at protecting pension pots will destroy final salary schemes in the UK and cost businesses hundreds of billions of pounds, a consortium of industry and labour bodies warned yesterday.
In a letter to EC boss Jose Manuel Barroso, the Confederation of British Industry (CBI), Trades Union Congress (TUC) and National Association of Pension Funds (NAPF) argued that applying new capital rules to pension funds will cost an estimated £300bn, hitting the workers saving for retirement and threatening to tip the companies offering the schemes into bankruptcy.
The European Insurance and Occupational Pensions Authority (EIOPA) will tomorrow present its recommendations to the European Commission, and is expected to push for Solvency II-style regulations to be implemented, bringing pension funds into line with insurance companies.
The aim is to make funds safer, giving them a capital buffer in case an economic shock puts them at risk – and means “risk-free”, liquid assets like government bonds will be prioritised over riskier assets like equities.
However, the NAPF argues this misunderstands how pension funds work: theirs are long-term investments, but insurers face more short-term risk if major events result in large payouts to customers.
“By demanding dramatic increases in funding from employers, the EC’s plans would – at best – force all remaining defined benefit schemes to close and – at worst – push many businesses into insolvency, leading to significant job losses,” the letter said.
“Far from benefitting employees and protecting scheme members, this would create a system in which job creation would be seriously hurt and pension provision inevitably damaged.”
It will also harm firms looking to raise cash by issuing shares.
Pensions minister Steve Webb joined the push to stop the rules being implemented, telling City A.M.: “Why are we even thinking about this? It is hard to see what question Solvency II is the answer to. These changes would be catastrophic, and we need to get in early to make our case before the decisions are made.”