Euro-thinking

July/August 2010

The new Government has certainly been keeping pensions-watchers busy. The blizzard of policy announcements from the Coalition has included everything from public sector pensions, to a review of the auto-enrolment reforms, to a radical rethink of the previous Government’s policy on pensions tax relief. Messrs Osborne, Duncan Smith and Webb cannot be faulted for effort.

With so much going on in Westminster, trustees could be forgiven for paying rather less attention to developments in Brussels, but that would be a mistake.

After months of drafting and redrafting, the European Commission has produced its long-awaited and heavily leaked Green Paper on the full range of pensions issues. Unusually for an EC publication, it is backed by a team of three commissioners. In Brussels terms, that makes it a blockbuster.

The document, ‘Towards adequate, sustainable and safe European pensions systems’, is expected to lead to a White Paper next year, plus a review of the main EU pensions legislation, the Directive on Institutions for Occupational Retirement Provision or ‘IORP Directive’. In the immediate term, there is a four-month consultation period, closing on 15th November.

Even a brief glance at the Green Paper shows that its implications could be far-reaching.

At its heart is a proposal for a revised solvency regime for pension schemes, drawing on the insurance sector’s Solvency II regime. Although the Paper includes some useful caveats on the distinctive nature of pensions, this proposal threatens a major increase in funding costs for pension schemes and employers.

The Paper also suggests an EU-wide requirement for a pension benefit guarantee system. Unlike the UK’s Pension Protection Fund, this would cover DB schemes and also ‘excessive losses’ in DC arrangements.

For the first time, an EU-level pensions-tracing service is proposed. And as part of the drive to strengthen the Internal Market, the Paper re-opens the debate on cross-border portability of pensions.

EC policy-makers have also addressed the challenge of securing a step-change in the number of people working longer. The EU’s ‘2020’ target is for 75% of people aged 60 to be in employment. According to the Green Paper, the figure is currently just 50%.

As the breadth of these ideas indicates, the Green Paper is nothing if not ambitious. It would be naïve to regard it as a mere think-piece; many of these ideas will be turned into concrete EU policies.

The NAPF has welcomed the Green Paper, but has stressed that a one-size-fits-all approach is inappropriate for Europe’s patchwork of pension provision. Although we share the EC’s objective of providing robust protection for members’ benefits, the UK already has such a system in place.

The EU means business on pensions. The UK pensions sector must ensure this important EU initiative gets the attention it deserves.

James Walsh is a policy advisor to the National Association of Pension Funds