(As published in FT 07/08/2012)
Let me set the record straight in response to Mr Hutton’s article “Brussels is set to create a pension disaster for Britain” (6 August): Yes, we need more occupational pension funds. No, the European Commission will not put occupational pensions at risk.
Throughout Europe, defined benefit schemes have suffered as a result of the financial crisis. This has led a number of employers in the United Kingdom and other countries to discontinue defined benefit schemes. This development reflects economic reality and has nothing to do with the planned review of the EU’s Pension Funds Directive, which dates from 2003.
The European Commission has not yet made any legislative proposals in this regard. What we have done so far is asked the European Insurance and Occupational Pensions Authority to carry out a quantitative impact study in order to examine the potential costs and benefits of the introduction of a more risk-based solvency regime to occupational pension funds. The purpose of this study, which will be initiated shortly, is to test in real life and together with all the relevant stakeholders a number of different options and technical parameters.
In contrast to what has been claimed in numerous press reports in the United Kingdom and elsewhere, the European Commission’s work in this field will be guided by a number of important principles: Account would be taken of the difference between a pension promise and an insurance contract, full recognition would be given to existing national supporting mechanisms, such as pension protection schemes and employer covenants and there would be no copy and paste from Solvency II, which is a prudential regime designed primarily for the insurance industry.
Moreover, the long term nature of pensions would be recognised both in the valuation of the pension liabilities and in the capital charges for long term investments. The idea is not to penalise certain types of investments but to give proper recognition to the risk mitigation effects following from a diversified investment portfolio. Finally, transitional rules would be foreseen as necessary.
No one can deny the challenges ahead in the pensions area. Ducking political responsibility by sacrificing the future for the present is not an option. Through the review of the Pension Funds Directive, the Commission will contribute to national pension reforms already underway in the United Kingdom and other countries, incorporate existing best practices and avoid regulatory arbitrage between insurance undertakings and pension funds, where these compete with interchangeable products in the single market.
European Commissioner for the Internal Market and Services