The European Commission is pushing through changes, as part of the controversial Solvency II process, which may prove “disastrous” for British businesses, says the Confederation of British Industry. The changes are set to cost businesses around £350 million, and, according to the CBI, stifle growth, increase unemployment and plunge pensions into chaos.
“Imposing £350 billion more costs on business would be a disaster for the economy and for pension saving.” said CBI Chief Policy Director, Katja Hall. “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.”
Solvency II, a Europe-wide effort to overhaul the insurance industry, involves in the Institute for Occupational Retirement Provision (IORP) directive – designed to insure minimum standards in pension investment and management. The plans specifically concern direct benefit pension schemes, and stipulate those schemes must hold sufficient funds to be able to pay out all benefits to employees, should a ‘worst-case scenario’ occur.
The CBI has strongly criticized the proposals, pointing out that pension schemes, unlike the insurance schemes Solvency II is aimed at, never encounter situations in which all benefits must be paid out simultaneously. The CBI have characterized the plans as “wrong-headed”, pointing out the situation against which they are designed to protect is a catastrophe which may occur only once in 200 years.
The changes to funding introduced by the directive would force pension trustees to reconsider the planned investment and growth strategies of their schemes. Ros Altmann, director general of Saga echoes the CBI’s position, pointing out that, instead of opting for ambition and growth at a time when the pensions industry desperately needs it, the IORP directive would force schemes to play it safe – sacrificing potential investment funds for an unnecessarily high insolvency buffer:
“If UK employers are forced to fund their pension schemes on a solvency basis, the closure of private sector schemes will be inevitable” Altmann said, “even worse, many employers may be bankrupted by the additional costs, resulting in workers ending up with reduced pensions in the Pension Protection Fund.”
The European Commission’s plans are redundant, claim the CBI, thanks to the “tough regulatory system” already in place for UK pensions. Katja Hall sees long term damage on the horizon if the plans are implemented:
“It’s alarming the Commission is still turning a deaf ear to calls from businesses, trade unions and pension funds to bin these proposals.” said Hall. “European pension funds hold assets worth over £3 trillion – a large proportion in the UK. These are exactly the long term sources of finance we need to get our economy moving – backing industry and entrepreneurs.”
The struggle to convince employees of the effectiveness of retirement saving is one faced by hundreds of companies. With the threat of a triple dip recession on the horizon, uncertainty is a huge problem for companies trying to expand and create jobs. With Solvency II very much an on-going process, that struggle looks set to continue.