The NAPF's David Astley has "one or two nagging doubts" about how the directive will affect implementation of scheme-specific funding standards.
LONDON - U.K. pension funds could be forced to take a major step backward under new funding rules adopted by the European Parliament.
Pension experts fear the rules would force U.K. plans to be 100% funded at all times - a requirement that could push schemes into far more conservative asset allocations that would ultimately be more expensive to plan sponsors.
The European directive "appears to be contradictory to (existing U.K. funding rules) and would put us under a strict funding requirement that we would not want at the moment," said Mike Stockwell, head of pension policy for the £800 million Kodak Ltd. Pension Plan, Hemel Hempstead, the U.K. subsidiary of Eastman Kodak Co.
The United Kingdom is Europe's largest pension market, with £776 billion ($1.25 trillion) in assets in occupational pension plans at the end of 2002, according to figures published by the National Association of Pension Funds.
Experts fret that the European Parliament's recently adopted pensions directive would force U.K. schemes to adopt an insurance industry-type standard, requiring full funding at all times, and derail current efforts to introduce more flexible scheme-specific funding rules.
Jean-Francois Schock, executive director, European sales and marketing for State Street Global Advisors, Brussels, said the full-funding requirements might lead pension plans to follow the example of many European insurers, whose tight solvency margins have forced them over the last year to move out of equities and invest in fixed income instead.
"At first reading it looks as though it will tend to make funding standards stronger than has been the case in the U.K. so far," said Chris Lewin, head of U.K. pensions for Unilever PLC, London.
He was concerned the directive might mean the U.K. government has to revise the work it has done so far on introducing scheme-specific funding requirements.
The U.K.'s National Association of Pension Funds recently raised these concerns with the Treasury and the Department of Work & Pensions, which were involved in the debates in the European Parliament, said David Astley, the NAPF's director of benefits. Officials at the Treasury and the DWP told the NAPF the directive would not impinge on proposals to introduce long-term scheme specific funding standards.
Mr. Astley said he is not entirely convinced of that and added that the NAPF would continue to remind the government of its commitment to introducing scheme-specific funding rules.
"We have one or two nagging doubts, but the proof of the pudding will be in the implementation," he said.
In a written reply to questions from Pensions & Investments, a DWP spokeswoman said officials there do not believe the funding provisions set out in the directive are more onerous than existing U.K. legislation.
"Our negotiations on the directive took into account the proposals for scheme-specific funding, and we believe that the near-final text we now have is broadly compatible with these proposals," she added.
The DWP is waiting for a slot in the parliamentary timetable to introduce legislation enabling scheme-specific funding rules.
Mark Sullivan, European partner for Mercer Human Resource Consulting, London, also believes the directive will not jeopardize the development of scheme-specific funding rules.
He said the directive gives scope for national regulators to use their discretion in its implementation. "The directive only lays down the minimum level of regulation."
Current U.K. funding rules, known as the Minimum Funding Requirement, give U.K. pension plans five years to reach 100% funding if assets of the pension plan cover 90% to 100% of liabilities. Plans with assets covering less than 90% of liabilities have three years to make good on the funding shortfall.
But it could be some time before U.K. pension plans feel the impact of the new European directive, which was accepted by the European Parliament in mid-March.
European Union member states have two years, until around mid-2005, to include the provisions of the directive into national law. They then have another five years to apply the law to local pension plans.
A final version of the directive has not yet been published, but experts say the wording of articles dealing with funding rules appears "woolly" and "imprecise."
But Chris Verhaegen, secretary general of the European Federation for Retirement Provision, Brussels, is in no doubt as to the law's intention.
"The principle that has been upheld in the directive is 100% funding, and that is the principle of the majority in the Council and the European Parliament," she said.
A difficult point
And this will pose a problem for the United Kingdom, she added. "It will be a difficult point. It's been a negotiating point for a long time."
U.K. delegates to the debate on the directive had been unwilling to accept the use of the terms "fully funded" in relation to domestic pension plans, she said. But the U.K. delegates did accept that pension plans operating across borders, the raison d'etre of the directive, would have to be fully funded at all times.
In the next few months, representatives of the European Commission will meet with national regulators to discuss how the directive will be implemented and where there might be sticking points, according to Alan Pickering, chairman of the EFRP.