EU proposes pan-European pension protection fund for both DB and DC

A pan-European pension guarantee fund that would protect the pensions of both final salary and DC scheme members is being proposed by the European Union.

An EU green paper due to be published on 23 June will consult on an EU-wide equivalent of the Pension Protection Fund that would not only assist members of schemes that become insolvent, but could also pay out compensation to DC investors who suffer severe losses. The paper,Towards Adequate, Sustainable and Safe European Pension Systems says that schemes in countries where solvency requirements were lower and asset value losses particularly large as a result of the financial crisis also tend to have poorer protection of accrued entitlements and the least flexible mechanisms for burden sharing.

The paper asks whether ’there is a need at the EU level for a pension benefit guarantee system, as already exists in some Member States’. It goes on to say ’such a guarantee system could not only address failures in sponsor-backed DB schemes or book-reserve schemes, but possibly also compensate excessive losses in DC schemes’.

The EU paper points out that such cross-national schemes already exist in the banking, insurance and investment space.

UK pension experts say the technical and political obstacles to creating such a scheme are immense, and point to the moral hazard issues raised by offering to insure DC investors who invest in riskier assets.

John Lawson, head of pensions policy at Standard Life says: “You have so much variety between the different schemes in different nations that it seems virtually impossible to see how this could work. We have scheme specific funding in the UK, in Holland they have conditional indexation, and every other country has its unique features that would add to the complexity. People will be very worried that our schemes could end up subsidising the schemes in other countries that have economic problems. It could end up like the situation where Germany is bailing out Greece.”