No certainties about solvency 

“NEW EU PENSIONS LAW THREATENS UK ECONOMY AND JOBS”, the National Association of Pension Funds (NAPF) recently declared in stark capital letters. The pensions industry has greeted the prospect of applying enhanced, Solvency II-style funding requirements to UK pension schemes with dismay. British businesses could need to pump as much as £1trn into their defined benefit (DB) schemes in order for them to survive the implementation of the legislation, according to dramatic projections from JLT Pension Capital Strategies.

The proposals, from the European Insurance and Occupational Pensions Authority (EIOPA), seek to make European pensions more secure for savers. By improving the funding requirements of DB pension schemes, the European regulators are hoping to ensure that pension schemes are holding a sufficient sum of money in reserve to cushion the blow, in the event of another financial crisis.

EIOPA’s other main objective is to harmonise pension scheme funding requirements across Europe in order to facilitate more effective cross-border pensions, which is something to be welcomed in today’s world, where cross-border workforces are becoming far more commonplace.

These intentions sound noble on paper, and may well prove effective in the majority of European countries, where enormous pension fund deficits are not an issue. However in the deficit-laden UK pension scheme sector, companies and associations are queuing up to condemn the proposals, from hedge funds to consultants. Estimates of how much it will cost UK employers with DB pension schemes fluctuate wildly indicating that, for the moment, the financial repercussions are completely unpredictable.

There are some certainties, however. The pressure to comply with such stringent requirements would drive companies with large pension fund deficits to bankruptcy and result in drastic changes to investment strategy among companies that survive the assault on their balance sheets. Equities will become much more expensive to hold, driving investors towards government bonds.

Trustees would also have to take account of the new funding requirements, and training would have to be tailored accordingly. Some believe that the introduction of Solvency II-style buffers would drive non-professional trustees out of pensions altogether, so complex would be the process of adhering to the new requirements.

EIOPA’s consultation period closed in early January; the organisation will presently be reviewing the many submissions it has received from concerned industry stakeholders. A definite timeframe for implementation – and whether in fact Solvency II will be introduced for pension schemes at all – is still unclear. Towers Watson predicts that, like the original Solvency II which was introduced for insurance companies, it will take many years to implement the proposals. The consultant also believes that little other public consultation will take place – hence the strong and public response of the pensions industry.