UK - Forcing Solvency II onto UK pension schemes will increase liabilities by £500bn (€575bn) and force a "massive" flight from equities, the Confederation of British Industry (CBI) has predicted.

Speaking at the organisation's pension conference today, the CBI's chief policy director Katja Hall also argued that the staggered staging dates for auto-enrolment the lobby group had fought for - thereby spreading the immediate cost over several years - was keeping the reforms alive.

Regarding the potential introduction of Solvency II - proposed by the European Commission - Hall said there was "no reason" for changes to the current pension system, insisting it had proven itself during the recent financial turmoil.

She argued that removing the need to seek significant returns on investments would lead to a "massive" flight from equities, with schemes focusing instead on government bonds at a time when the euro-zone debt crisis had resulted in a shift to supposed safe-haven assets, reducing bond yields.

"With the volatility we have seen in international money markets, pension funds piling into more secure government bonds would push down yields and create even more pressure on sponsors as investments fail to deliver," Hall argued.

She further said the CBI was not the only group concerned about the Solvency II proposals put forward by the European Commission.

"We have told the Commission, trade unions have told the Commission, the pension funds have told the Commission - but they don't want to listen," she told delegates.

Arguing that the proposals would also undermine the UK government's current economic goals, she said introducing Solvency II was based on the "wrong-headed" notion European defined benefit (DB) schemes were identical to insurance contracts.

"We need the UK government to step up to the plate in Brussels and stop the imposition of insurance-style solvency standards on defined benefit pension liabilities," she said. "The government can do a lot more than it has to date."

The application of Solvency II has long been a contentious issue, with industry bodies such as the UK's National Association of Pension Funds warning that it would accelerate DB scheme closures, while the European insurance and reinsurance federation CEA has repeatedly called for "same risks, same rules, same capital". 

Addressing the introduction of auto-enrolment in the UK, set to commence from next autumn, Hall said it would likely be 2015 - "when we hopefully will be out of the economic wilderness" - that the soft compulsion changes would come into effect.

She highlighted the lobbying done by the CBI, saying that, if it were not for the staggered introduction of auto-enrolment - allowing for staging dates between October next year and 2016, dependant on company size - the reforms would have already been scrapped.

Speaking of how the staggered introduction would spread out costs for companies, she said: "What seemed like a nice-to-have flexibility in the good days is today keeping the reforms alive by providing much needed breathing room for employers."

However, Hall conceded that, even with higher than expected opt-outs from savers, the reforms were "robust enough" to survive.

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