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Capital requirements 'disastrous' for pensions, growth, Commission warned

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  • Capital requirements 'disastrous' for pensions, growth, Commission warned

UK - Increased capital requirement measures under a revised IORP directive could lead to the closure of all remaining UK defined benefit schemes and push businesses into insolvency, a letter from UK employee and employer representatives to the European Commission has warned.

In a letter sent to Commission president José Manuel Barroso today, the National Association of Pension Funds (NAPF), alongside the Confederation of British Industry (CBI) and the union umbrella organisation TUC, said that the revised directive on occupational pensions would "undermine" the retirement prospects of millions of Europeans and have a "disastrous impact" on the long‐term growth and employment in the single market.

According to the three organisations, companies sponsoring occupational pensions would see the cost of such funds increase significantly due to the capital requirements imposed.

"This would force them to divert money away from investment in growth, job creation and research and development", the letter said.

In addition, the NAPF, CBI and TUC argued that pension schemes would need to review their investment strategy in order to comply with the new regulations.

Like many pension associations and asset managers, the three organisations believe that investment strategies would shift away from return‐seeking assets - such as equities - into risk‐free high‐quality bonds and gilts, if liabilities were to be calculated using a risk‐free discount rate.

"Less equity investment would restrict capital flows to businesses, at a time when they are being asked to put even more cash into schemes", the letter continued. "With European pension funds holding over €3trn in assets, a major switch in asset allocation would have an immediate catastrophic impact on the stability of European financial markets."

Katja Hall, the CBI's chief policy director and one of the letter's signatories, previously warned that Solvency II regulations would cause a "massive" flight from equities, with funds forced to focus on fixed income over investment in the stock market.

She said at the time that "large and unpredictable liabilities" were harimg a company's ability to both attract investment and grow as a business.

"What's completely unacceptable is Brussels' plan to impose further costs on firms operating defined benefit pensions at a time like this, when the protection in place has already proven itself during the economic crisis," she said last year.

Joanne Segars, chief executive of the NAPF, today insisted that Solvency II type rules would put extra pressure on companies struggling for survival, and also force them to divert money away from investment and new jobs.

"Faced with extra funding demands, many businesses will simply shut their final salary pension down", Segars said.

The letter was sent as the Commission is set to receive draft advice on the IORP directive from the European Insurance and Occupational Pensions Authority (EIOPA) this week.

In its draft proposal, the EIOPA highlighted the need to conduct a quantitative impact studies (QIS) on the holistic balance sheet approach (HBS) proposals, which aim to replace Solvency II capital requirements proposed by the Commission.

The NAPF, the CBI and TUC however criticised the lack of action taken by the Commission in their letter to Barroso.

They expressed concerns over the fact that the Commission has not yet carried out a comprehensive and detailed quantitative impact assessment on its proposals.

"While we welcome EIOPA's commitment to carry out its own quantitative
impact study, a comprehensive macro‐economic impact assessment must be carried out by the Commission before any decision is made on whether to go ahead with a new draft Directive", they argued.

The HBS approach has been widely criticised in the UK and elsewhere in Europe.

In its response to the Call for Advice on the revised IORP directive early this year, the EIOPA Occupational Pensions Stakeholder Group (OPSG) agreed that a holistic framework "might be helpful" but said that the components needs quite some judgement and is likely to be "subjective and approximate".

The European Federation for Retirement Provision (EFRP), which also welcomed the idea of taking into account all the risk instruments an IORP can have, echoed those concerns, warning that the HBS was too complex to serve as a primary tool of supervision.

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