Solvency II-style pension regulation could double deficits, industry warns

A new survey, commissioned by business advisory firm Deloitte, found that firms believe that their scheme liabilities will increase by between 20% and 50% if the European Insurance and Occupational Pensions Authority (EIOPA) goes ahead with its proposals. This would amount to an increase of as much as £2.5 billion for the average FTSE 100 company.

Feargus Mitchell, head of pensions at Deloitte, said that the proposal would be "one more factor that will accelerate the decline of defined benefit pensions in the UK". The firm surveyed 20 large public and private companies with combined pension liabilities of £100bn.

"Almost without exception, respondents are critical of the proposals," he said. "They believe that given the current climate, when pension deficits are already high and the economic outlook is uncertain, now is not the time to introduce new obligations that will incur further expenses and increase deficits."

In its call for advice issued to EIOPA last April, the European Commission said that it was looking to introduce risk-based supervision for pension providers as part of its reform of the European Pensions Directive (Institutions for Occupational Retirement Provision Directive or IORP). The new system should, it said, be compatible with the solvency requirements due to come into force for insurers from 2014 under a regime known as Solvency II "to the extent necessary and possible".

Last month the regulator  proposed a 'holistic balance sheet' approach, which it said would ensure that pension funds across Europe meet similar solvency requirements regardless of whatever national security mechanisms are in place. In certain EU member states pensions are sold by insurance companies, which is why the Commission is seeking the same tighter standards. However the UK already has strict protections in place for occupational pensions, including a Pension Protection Fund (PPF) which will pay out to scheme members in the event of an employer's insolvency.

Pensions law expert Carolyn Saunders of Pinsent Masons, the law firm behind Out-Law.com, said that EIOPA's proposals were "misconceived" because of the "fundamental differences" between occupational pension schemes and insurance products. Occupational schemes are provided with ongoing support as part of an employer's remuneration package, while insurance products are purchased by way of one-off premium with "no sponsor standing behind the insurer in the way that an employer stands behind its occupational scheme", she said.

"EIOPA intends that its proposals will create a level playing field between occupational pension schemes and insurance, but its 'one size fits all' approach is wholly inappropriate," she said. "Whilst it may achieve the desired effect, the potential additional funding required will drive even more employers away from defined benefit provision – which will prejudice the long-term security of occupational scheme members."

Although the holistic approach proposed by EIOPA is intended to take into account built-in security mechanisms such as the strength of the employer covenant and the existence of national guarantees such as the PPF, the potential introduction of stricter solvency requirements has been met with outcry from many in the UK pensions industry. Bodies such as the National Association of Pension Funds (NAPF) and the Confederation of British Industry (CBI) have warned that the proposals will "undermine the retirement prospects" of millions of citizens and have a "disastrous impact" on economic growth, while the Government's Pensions Minister Steve Webb has said that it would be a "nightmare scenario" that would inevitably lead to scheme closures.