The European Insurance and Occupational Pensions Authority (EIOPA), the European Union’s technical level body for pensions and insurance supervisors, this week published its preliminary assessment of the quantitative impact on the funding of defined benefit (DB) pension schemes of applying EIOPA’s proposals for Solvency II type funding requirements to DB pension schemes.
EIOPA’s figures admitted that the proposals would result in an additional funding shortfall for UK pension schemes of £450bn. This is broadly in line with a separate assessment that The Pensions Regulator carried out for the Department of Work and Pensions last year. This estimate results from assuming a risk free rate be used for calculating pension liabilities, that allowance be made for the employer covenant and that an additional Solvency Capital Requirement is required.
The Solvency II proposals were roundly condemned when they were first mooted and this latest revelation has understandably led to a further round of criticism of the proposals. Steve Webb, UK Minister for Pensions, called the plans reckless and said,
“The EU’s latest figures show the extremely high cost of its plans would place on UK 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 business’ ability to invest, grow and create jobs, and many more schemes would be forced to close. I continue to urge the Commission to abandon these reckless plans.”
Joanne Segars, Chief Executive NAPF, said the EU plans for UK pensions came with a clear and unpalatable price tag and called on the EU to rethink the whole project instead of trying to hurry the proposals through. She remarked, “It (The EU) would be better to focus on the 60m EU citizens who have no workplace pension, instead of eroding the good pensions already in place.”
Plainly if these proposals were to go through they would have a devastating effect on UK business and pension provision. Solvency II is a new financing regime that applies to insurance companies in the EU. The European Commission 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. It has to be hoped some sense and reason will prevail, but the EU seems determined to press on regardless.