Pension schemes continue on the slippery slope of decline?
Another study has indicated why the changes the European Commission envisages would be bad news for UK defined benefit pension schemes. This time it was the preliminary results of the Qualitative Impact Assessment, recently published by EIOPA (European Insurance and Occupational Pensions Authority) for the EC which showed the impact of proposed changes to the Institutions for Occupational Retirement Provisions Directive.
The study estimated that UK defined benefit (DB) schemes would have to put £450billion into schemes to maintain scheme funding levels. This could result in increases in members’ pension contributions or cuts in scheme benefits, or worse still scheme closures to new members, or closures to future accruals. It will also have wider economic implications for businesses as they will have to divert money into their schemes rather than invest in company growth, job creation and R+D.
The EC are proposing that IORP-II is based on the Solvency-II Directive which covers contract-based pension schemes and annuities which are different to DB schemes in that they are provided by insurance schemes. A key part of this Solvency- II model is the concept of the ‘Holistic Balance Sheet (HBS)’, the idea of which is to value assets and liabilities on a market-consistent basis across Europe.
However the TUC, along with a number of stakeholders, and the UK government, Pensions Regulator and Pensions Protection Fund oppose this model as the UK already has a tested scheme-specific model for valuing pension schemes’ assets and liabilities. We are concerned that the HBS, underpinned by Solvency II type capital requirements, could require schemes to put extra funds into schemes and could thereby increase scheme deficits.
The QIS was conducted in eight European countries: Belgium, Germany, Ireland, the Netherlands, Norway, Portugal, Sweden and the UK. The study showed the consequences of the HBS would be worst in the UK. The number of countries that oppose the changes to the IORP Directive has recently expanded, and now includes the UK, Ireland, Germany, the Netherlands and Belgium. Sweden may become the next member of the group of opposition countries. If Sweden did join, this would be a sufficient number of countries in the blocking minority to vote against – or abstain from – the proposed changes to the IORP Directive to increase pension capital requirements. Will the EC now start to listen that this is not a good idea?