Finally, some good news from Europe
Pension stakeholders in the UK breathed a collective sigh of relief yesterday when the European Commission abandoned its plans to apply Solvency II-style insurance regulations to defined benefit pension funds.
Trade unions had strongly opposed the Commission’s plans – as had employers, the industry and the government. We opposed the plans in principle, because the Commission had seriously misunderstood the nature of UK pensions provision, and our protection regime, and over-estimated the feasibility of cross-border provision. And we opposed them on practical grounds after an initial impact study by the European Insurance and Occupational Pensions Authority (EIOPA) indicated possible solvency requirement costs of £400 billion for UK pension funds.
The Commission will proceed with some aspects of its plans for a revised ‘IORPs’ directive (IORPs stands for ‘institutions of occupational retirement provision’ – what we know as defined benefit trusts). It will seek to apply the second and third pillars of Solvency II, on governance and disclosure. The UK has less to fear from such measures – it is likely that our pension funds are already compliant, much more so than our insurance companies are with the original Solvency II – and it is also possible that a collective European approach to these issues would lead to some positive changes in the interests of pension scheme members.
Of course, these measures would not address the main problems with defined benefit pension provision in the UK. The problems are more about the small-scale nature of many schemes (which Labour will today issue proposed remedies for), valuation and accountancy rules, and the stuttering economic recovery. But like quantitative solvency requirements, these are issues best addressed at the national level, given the unique characteristics of how pension systems operate in different member-states.
There are two related developments emanating from Europe that are worth mentioning. The first is the Commission’s recent green paper on long-term investment. This is a very interesting document, with several good ideas for boosting long-term investment across the European economy. It was noteworthy most of all, however, for acknowledging the profound importance of DB trusts in capital investment – a role that the Commission’s proposals for a pension Solvency II would have put in jeopardy.
The second is EIOPA’s publication of a discussion paper (pending a full consultation) on personal pensions. Again, this is potentially good news. More competition might lead to better deals for consumers, and EU regulation could lead to higher standards. There are however huge question marks, again, about the efficacy of European regulation. The paper defines personal pensions as products where ‘employers do not play a role in establishing a [personal pension] but may pay contributions to an individual [personal pension] on behalf, or for the benefit, of the employee, self-employed person or other individual’.
This seems to be a rather clumsy attempt to capture the diversity of how personal pensions are used across Europe. In the UK, regrettably, personal pensions actually masquerade as occupational pensions in many workplaces (and many more after auto-enrolment is embedded). Employers play a much bigger role than simply making contributions – they actually collaborate with providers in setting up ‘group personal pension’ schemes for their staff. A single market in personal pensions might make these products better in some ways, but what we really need is to import the governance features of real occupational pensions into the prevision of work-based personal pensions.
Through the debate on IORPs we are starting to learn about the ways in which Brussels can assist trade unions’ agenda in support of UK pension savers, but also the limitations of European-level regulation. The abandonment of Solvency II is a signal that the Commission is learning too. Hopefully it will now provide the space and resources for work in areas where their contribution will help rather than hinder.