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UK pension industry applauds pillar 1 decision but remains 'vigilant'

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  • UK pension industry applauds pillar 1 decision but remains 'vigilant'

EUROPE – UK pension experts have welcomed the decision to postpone the introduction of capital requirements set under the revised IORP Directive, but they also expressed fears Brussels might try to force similar rules on pension funds in a few years' time.

The EU commissioner for internal market and services, Michel Barnier, announced yesterday he would postpone the introduction of pillar one of the new IORP Directive, arguing that the solvency rules should be an "improvement for the pensions sector, rather than a punishment".

The UK government met the decision with joy.

Pensions minister Steve Webb said: "This is a welcome move by the commissioner and is hopefully a sign he may eventually abandon his damaging and reckless plans altogether.

"Introducing Solvency II-style rules for defined benefit pension schemes would push up liabilities by up to £400bn (€470bn), harming businesses' ability to invest, grow and create jobs, and put more schemes at risk."

Webb said the Commission's decision was a sign that opponents of the dropped pillar 1 rules were "winning the argument".

The National Association of Pension Funds (NAPF) also applauded the decision, saying Solvency II-type rules would have caused "great damage" to the UK pensions industry.  

Joanne Segars, NAPF chief executive, said the association was "very pleased".  

"This is the right approach, and we are fully committed to working with the European Commission to find good rules on governance and disclosure," she said.

James Walsh, EU and international policy lead at the association, pointed out that the proposals could have increased UK defined benefit pension deficits by 50%, "causing great damage to pension schemes and their sponsoring employers".

Others echoed those thoughts.

Colin Richardson, senior actuary at Buck Consultants, said: "Implementation in its draft form would have accelerated over a short number of years amounts up to £500bn to extinguish deficits and create capital buffers to meet the requirements."

At JLT Employee Benefits, director Charles Cowling added that Solvency II has cost the insurance industry hundreds of millions of pounds to little effect.

"The now-postponed funding rules for pensions could have been even more costly for pensions," he said.

However, some also voiced concerns over future legislation.

Richard Butcher, managing director at consultancy PTL, said the industry needed to "remain vigilant".

Jane Beverley, head of research at Punter Southall, said the issue was likely to reappear at some point in the future.

"The commissioner notes that there is still a need to guarantee in the longer term a level playing field between different providers of occupational pensions," she said.

"This means that, perhaps, the idea of the holistic balance sheet has not yet gone away for good."

For others, the focus is now elsewhere.

Georgina Beechinor, an associate at law firm Sackers, insisted the new focus in the short term would be on governance and transparency, areas on which there was already "substantial consensus" and could "much more readily" be applied to the different types of pension arrangements found in various member states.

However, not everyone shared her views.

Dave Roberts, senior consultant at Towers Watson, warned against the potential risks arising from pillars two and three of the directive.

"There has been a casual acceptance that this would be an acceptable compromise for dropping the 'funding pillar' because it was the capital requirements that produced the scary numbers," he said.

"Instead of relaxing and indulging in 'victory', the UK pensions community now needs to turn its attention to what these governance and disclosure requirements might mean.

"The 'big' battle may have been won, but the 'smaller' ones matter, too."

Martin Lowes, partner at Aon Hewitt, supported the argument made by Roberts and stressed that the detailed requirements for insurance companies had caused them a lot of work.

"Unless the requirements are adapted appropriately for pension schemes – which are generally much smaller and simpler than insurance companies – they will be unduly onerous, particularly for smaller schemes," he said.

Jonathan Camfield, partner at consultancy LCP, went on to argue that governance and reporting requirements ran the risk of becoming a measuring stick for pension risk.

"For example, ratings agencies, credit analysts, lending banks and investors might start using the numbers to assess pension risk for UK companies," he said.  

"This might be fine if the required figures were fit for purpose, but from everything we have seen so far, we strongly suspect they won't be."

But some kept faith in the Commission's decision to postpone the introduction of pillar one.

While Nick Griggs, a consultant at Barnett Waddingham, said there was still hope the Commission would give "proper consideration" to proportionality and "the unique circumstances" of occupational pension schemes, Paul Sweeting, European head of strategy at JP Morgan Asset Management, said pension schemes could now concentrate on strengthening their finances under existing funding regimes.

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