NAPF Says EU Plans Risk Undermining UK Pensions

(November 16, 2010) — The National Association of Pension Funds (NAPF) has cautioned that new European Union rules on pension funding could increase the rate at which companies are closing their definite benefit schemes.

The EU is in an early stage of proposing new rules under which pensions would need to hold similar levels of capital as insurance companies do under the Solvency II regime. The NAPF has stated its belief that it would be unfair for pension providers to be put in the same risk category as insurance companies since unlike insurance firms, retirement funds typically face predictable outgoings. Since pension schemes’ liabilities are known, solvency rules used for insurers were not appropriate for pension funds, the group said. “While a Solvency II type system of regulation is appropriate for insurance, the Commission needs to recognize that occupational pensions operate in a very different way,” Joanne Segars, chief executive of the NAPF, said in a statement. “The UK pension system already provides a strong system of member protection through the strength of the employer covenant, the work of the Pensions Regulator and the safety net provided by the Pension Protection Fund.”

The NAPF, which shares its concerns with the Confederation of British Industry (CBI), Trades Union Congress (TUC), Institute of Chartered Accountants in England and Wales (ICAEW), and Institute of Chartered Accountants of Scotland (ICAS), noted that it’s essential that the EU acknowledge the rich diversity of pension provision across member states when thinking about how to meet its core objectives of member states providing a strong, adequate and sustainable pension system.

CBI added: “Britain already has a well-regulated system thanks to the Pensions Regulator. Applying a ‘one-size-fits-all’ approach to the EU’s pension schemes would be a mistake. Each of the 27 countries has different kinds of pension arrangements and the rules would be particularly harmful to Britain’s remaining final salary pensions. Unlike those in many other countries, the UK’s final salary schemes are index-linked and rise in line with inflation.”

Pension providers have said the financial impact on the proposed changes is difficult to predict. However, a recent study by actuarial consultants Punter Southall indicated that a ‘solvency buffer’ could significantly increase the price tag of running a typical final salary scheme by 90%. NAPF’s Segars warned that the potential rise in costs would force many employers to reconsider whether they could still afford to run DB schemes.