UK would have been "crippled" by EU pension scheme funding proposals, consultants say

According to the quantitative impact study (QIS) on the financial implications of the proposals (168-page / 5.2MB PDF), published last month by the European pensions regulator EIOPA, imposing insurance-style regulation on pension schemes would have cost UK companies as much as 46% of the country's GDP. Pension consultancy LCP arrived at the figure after analysing the QIS, and described the results of its research as "staggering".

"Our research demonstrates that the impact of Europe's pension proposals would have been gargantuan for the UK when compared to other countries," said LCP's Jonathan Camfield. "These proposals would be crippling for the UK economy."

"Whilst we are pleased that the European Commission has put these proposals on hold we are concerned that the ongoing work by various European bodies and the statements being made from Brussels suggests that the issue remains firmly on the agenda, and it not going to go away quickly," he said.

The Commission had proposed the introduction of more stringent solvency requirements for pension providers as part of its reform of the Institutions for Occupational Retirement Provision (IORP) Directive, due to be debated in the autumn. That new system should, it had 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".

However, EU Internal Market and Services Commissioner Michel Barnier announced in May that "further technical information" would be required before new rules around the solvency of pension funds would be introduced. Instead, the amendments would focus on improving the governance and transparency of occupational pension funds, he said.

The Commission had previously said that new solvency rules were necessary to ensure a "level playing field" between insurance companies, which sell pensions in various EU member states, as well as to protect the pension savings of cross-border workers. 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 participating defined benefit (DB) schemes in the event of an employer's insolvency.

In a statement, Barnier said that the proposals were not being abandoned entirely, but rather would remain an "open issue" which "should be re-examined once we have more complete data".  He said that countries which had undercapitalised pension funds should "take the necessary measures without delay" to bring those funds into line and protect future pensioners.

LCP said that the results of EIOPA's QIS showed that the cost to the UK of implementing the new solvency requirements as proposed would have a disproportionate effect on the UK when compared to the estimated cost to other European countries. Its analysis showed that Germany and Ireland would only face additional costs worth 2% of their GDP, while Belgium would be hit by just 1%.

Camfield added that the firm's research showed that UK companies faced challenges relative to their European counterparts, "even if Europe does not require UK employers to recognise these additional costs at the moment".

"This begs the question whether the UK private sector can manage to pay off all its pension promises, whilst remaining competitive with other European countries over the coming decades," he said.