Solvency II costs "in line with worst case scenario" for UK pensions, says minister

Steve Webb was commenting as the European Insurance and Occupational Pensions Authority (EIOPA) published the preliminary results of its quantitative impact study (QIS) (78-page / 2.2MB PDF) of the plans, requested by the European Commission. The document shows that proposed revisions to the Institutions for Occupational Retirement Provision (IORP) Directive would place £450 billion worth of additional funding requirements on DB schemes, he said.

"The EU's latest figures show the extremely high cost its plans would place on UK defined benefit pension schemes," Webb said. "In fact, its estimate of a baseline £450bn 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 businesses' ability to invest, grow and create jobs, and many more schemes could be forced to close. I continue to urge the Commission to abandon these reckless plans," he said.

The European Commission has proposed the introduction of risk-based supervision and more stringent solvency requirements for pension providers as part of its revised IORP Directive, due to be published in the summer. The new system should, it has said, be compatible with the solvency requirements due to come into force for insurers from 2014 under a regime known as Solvency II "to the extent necessary and possible".

The new rules are necessary to ensure a "level playing field" between insurance companies, which sell pensions in various EU member states, as well as protect the pension savings of cross-border workers, according to the European Commission. However, the UK already has strict protections in place for occupational pensions, including a Pension Protection Fund (PPF) which will pay out to members of DB schemes in the event of an employer's insolvency. DB schemes promise a set level of pension once a member reaches retirement age, and although their use is on the decline due to high costs, they continue to account for a considerable amount of the private pension assets in the UK.

EIOPA, which regulates European insurers and pension providers, has proposed a "holistic balance sheet" approach. The requirements are intended to ensure that pension funds across Europe meet similar solvency requirements regardless of whatever national security mechanisms are in place. Various components of the sheet will be assigned different values. These could include the scheme's assets in relation to its liabilities and the employer's covenant, or ability to support the scheme, as well as the existence of national guarantees.

In its report, EIOPA stressed that the results of its study were "preliminary" and that there had "not been enough time" to resolve issues that had been identified during the study "satisfactorily". It intends to publish its final report in the summer, it said.

Trade body the National Association of Pension Funds (NAPF) condemned the European Commission for its "ludicrously tight timetable" for implementing the proposals. It called on the authorities to rethink its plans and instead "focus on the 60m EU citizens who have no workplace pension, instead of eroding the good pensions already in place".

"The EU plans for UK pensions come with a clear and unpalatable price tag," said Joanne Segars, NAPF chief executive. "Businesses trying to run final salary pensions could be faced with bigger pensions bills to plug an astonishing £450bn funding gap. This would have a highly damaging effect for the retirement prospects of millions of UK workers."

Pensions expert Robin Ellison of Pinsent Masons, the law firm behind Out-Law.com, said that it was becoming obvious that there was "consensus" elsewhere in Europe that "requiring the overfunding of pension systems is a foolish waste of corporate capital".

"It may be of course that the EU is fighting the last war; the future of corporate pensions is very likely to be book-reserve based, which is outside the whole EU pensions regime and very likely to remain so," he said. "It seems that the campaign mounted by the UK, the Netherlands, Belgium and Ireland is succeeding – though the problem does keep popping up elsewhere rather like whack-a-mole."