Pensions hayhem

EU “Solvency II-style” pension proposals will saddle UK businesses with £350bn of extra costs, cause 180,000 jobs to be slashed and damage long term growth prospects by 2.5%.

That’s the doomsday scenario being painted by the Confederation of British Industry’s (CBI) latest research on the European Commission’s desire to impose a new funding regime for pensions, which would force employers to divert hundreds of billions of euros into defined benefit schemes.

The plans would compel pension schemes run by individual employers to implement similar changes to those proposed for insurance firms – which under the EU’s “Solvency II” rules must have sufficient funds in place to pay out for a once-in-200-years catastrophe.

But the analysis, by independent economic consultants Oxford Economics, supports the CBI and other European business leaders’ fears that the reforms would be a “disaster”.

The body has branded the planned reforms “wrong-headed” as pension funds - unlike insurance schemes - never have to pay out all benefits at once. Pension liabilities are spread across many years.

It says the proposals would force firms to cut jobs and to pass costs on to customers and employees to meet the additional demands from Brussels.

And it says the plans would require pension schemes into "low-risk" investments in "safer" products such as government bonds – reducing returns and forcing up costs for employers, as well as discouraging funds from investing in long-term assets such as infrastructure.

The proposals are part of the Commission’s proposed review of the Directive for Institutions for Occupational Retirement Provision (IORP), which lays down EU-wide rules to strengthen pension security. It is inspired by the ongoing Solvency II process – a fundamental review of the capital adequacy regime for the European insurance industry.

CBI chief policy director, Katja Hall said:

‘Imposing £350bn more costs on business would be a disaster for the economy and for pension saving. The long term economic outlook is so fragile and uncertain that it is crazy to entertain proposals which would cost jobs and cut so deeply into our long-term growth and competitiveness.’

‘Workplace pensions are vital to ensuring people have enough money for their retirement when life expectancy is rising – so future generations are not hit with huge bills or driven into poverty. The European Commission’s wrong-headed proposal will do nothing to help us cope with the burden of retirement.’

The report added that a shift in pension funds’ financial portfolios away from equity would cause additional downside risks by weakening the ability of small innovative growth firms to raise money for expansion and by increasing the risk of business liquidation.