Solvency II could cost UK pensions industry £400bn, minister says
EUROPE – Solvency II measures in the revised IORP Directive will end any prospect of risk sharing among UK companies, while the total cost to the local pensions industry could reach as high as £400bn (€498bn), Steve Webb has claimed.
Addressing a PensionEurope conference in Frankfurt, the UK pensions minister pointed out that it was currently illegal for companies in the UK to offer employees pension promises unless they were inflation protected.
"We are currently looking at ways to encourage firms to offer what you might call 'DB [defined benefit] light' – where pensions are essentially like the old DB style, but with more flexibility for the firm – or 'DC [defined contribution] plus' – which aims at getting more money in but also looks at scheme quality, scale, charges and governance," he said.
"What we do not want is a shift from high quality, final salary, index-linked pensions that are so expensive that firms won't want to provide them to a shift all the other way with minimalist DC and minimalist contributions."
Webb went on to say that UK companies wanted risk sharing but were "terrified" about Solvency II, and that Brussels would make those promises "very" expensive.
"The risk is that Solvency II will not only have a devastating effect on the European industry but destroy the prospect of risk sharing," he said.
Webb also referred to an analysis, published today, on an initial impact assessment he commissioned.
He said the study showed that the cost for the UK pension industry would be as much as £150bn if Solvency II rules for pension schemes were implemented.
"But this is not the bigger number," he added. "If the full Solvency II capital requirements came through, we would be talking about £400bn in the UK.
"When we discussed the final points of the QIS methodology, there was a huge elephant in the room – why are we doing this at all?" he said. "What is the question we are trying to answer that could possibly be in that territory?"
Webb finally argued that, in terms of scheme closures, his research showed that, over the coming decade, only one DB scheme out of 20 would remain open to new members in the UK if Solvency II rules were introduced.
"This would kill DB," he said.