An inconvenient truth

Consensus is very thin on the ground in the field of UK pensions, but when it comes to the European Union’s solvency consultation, this country is certainly presenting a united home front. Of the many interventions into the UK financial services system that providers, advisers and industry bodies are having to deal with, the EU plan to introduce a Solvency II for pensions has galvanised the sector into a chorus of protest.

Bodies as diverse as the CBI, TUC, ICAEW and NAPF have all come together to condemn the proposal for a new solvency regime for pension funds, arguing that to do so runs the risk of undermining pensions provision rather than strengthening it. But just because everybody in this country is singing from the same hymn sheet, it does not mean EU lawmakers will agree. European policy officials considering the protection of British Airways pensioners, for example, could be forgiven for thinking all is not as one might hope it should be.

The EU launched its Green Paper – Towards adequate, sustainable and safe European pension systems – back in July, and with the date for submissions closing in November, stakeholders have been publicly voicing their concerns at proposals that more be done to protect consumers than the substantial protections already in place in the UK. Pensions organisations fear the proposed solvency regime could mirror
the system that was adopted by the EU for the European insurance industry. The NAPF argues this would not be appropriate because the pensions industry works in a very different way from the insurance industry.

Joanne Segars, chief executive of the NAPF, says: “While a Solvency II type system of regulation is appropriate for insurance, the Commission needs to recognise that occupational pensions operate in a very different way. “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. Additional solvency requirements on UK schemes would work against the Commission’s objective of promoting
adequacy of pension provision and could lead to the further closure of defined-benefit schemes.

“There is a rich diversity of pension provision across Member States. It is important that the European Commission recognises this when thinking about how to meet its core objectives of Member States providing a strong, adequate and sustainable pension system.”

It is a view shared in Westminster, although the Department for Work and Pensions has been rather more polite about the plan, describing it as a ’timely contribution to the debate on the challenges of an ageing society’ before pouring cold water on the proposal.

Minister for Pensions Steve Webb says: “It is important that we have a considered, wide ranging and open discussion about how to ensure
pensions are secure and affordable, and encourage individuals to save for their retirement. However we don’t believe that there is a “one size fits all” model for pension systems across the EU. We fully support creating a robust and sustainable single market for insurance, but we don’t believe the new capital solvency requirements should be applied to occupational pensions.”

Stuart Southall, chairman of the Association of Consulting Actuaries is joining in the calls for proportionate governance. He says: “We believe that the IORP directive with its requirement for the prudent funding of pensions already provides an appropriate balance between protecting members’ benefits and keeping the cost to employers at an affordable level. The EU Green Paper itself notes that regulation should
be proportionate and not push employers into insolvency or into abandoning pension schemes. The UK has a sophisticated regulatory regime
that has been built over a number of years to suit the shape and style of provision here. EU intervention would inevitably disturb the checks and
balances in that system. Many hardpressed employers providing ’quality’ schemes would see such intervention as the final straw.”

Richard Hobbs, director of regulatory consulting at Lansons, says: “Certainly, we do not agree that Solvency II – as is suggested in the EU paper – could ever be a good starting point for the regulation of pensions because of the considerable differences between insurance and pensions.”

The reality is that the UK simply cannot agree to such a proposal at present because virtually every scheme in the land would fail such a test.

If you adopted a Solvency II standard, and its mark to market approach, not one of our DB schemes would be solvent and many employers could do nothing about it.”

Hobbs adds: “The UK has a vulnerability here. On the one hand it is arguable that since the liability does not fall due for a long time, it is the wrong measure. On the other hand, why should personal pensions have to come under Solvency II when DB schemes do not?”

So given UK employers could simply not handle such a strict standard, will this issue be batted out of the ground or hit into the long grass? Hobbs believes we have not seen the last of this one. “In the long term there is going to be a trial of strength over this question – that is what the Consultation Paper is building towards.”