Opposition is intensifying against a European Commission proposal to apply to defined benefit funds a set of regulations originally targeting insurance companies, as the initiative moved a step closer to becoming reality.
“This is the No. 1 regulatory threat to U.K. pension schemes,” said James Walsh, London-based EU and international senior policy adviser at the National Association of Pension Funds.
Released earlier this month, a quantitative impact study on the affect of Solvency II regulations on pension funds estimated that combined U.K. defined benefit deficits alone would rise to about £450 billion ($689.5 billion), or a 24% shortfall measured against risk-free liabilities. In comparison, the current aggregate deficit of about 6,300 plans tracked by the Pension Protection Fund is estimated around £237 billion as of March 31.
Other major DB markets such as the Netherlands, Ireland, Germany and Belgium would also be worse off, although not likely to the extent of the U.K. All five nations are opposing the EC proposal, which aims to use at least portions of the Solvency II regulations as a blueprint for the new Holistic Balance Sheet provision within the Institutions for Occupational Retirement Provision II Directive.
Critics point to the increase in costs to companies at a time when the European economy is already in the doldrums. Furthermore, any additional pressure on pension plans will likely result in a quicker pace of DB plan closures, sources said.
“This confirms that any such new rules would harm businesses' ability to invest, grow and create jobs, and many more schemes could be forced to close,” U.K. Pensions Minister Steve Webb said in a statement following the publication of the report, titled “Preliminary Results for the European Commission.”
The commission previously estimated the cost of implementing Solvency II for the European insurance sector to be between e2 billion ($2.6 billion) to 3 billion over a period of five years, partly because of the cost of meeting new data requirements.
“If applied to the pension industry, there will be the same problems of recalibrating the data in order to report back to the regulators, and the cost associated with that,” said Mark Westwell, London-based senior vice president and regional client management executive in Europe, the Middle East and Africa for State Street Global Services who advises clients on Solvency II.
Another “real concern” is that the proposed regulations would accelerate the shift of plan investments to bonds from equities, potentially harming economic growth in the region, Mr. Walsh added. “The left and right hands of (the EC) are not working together. On the one hand, the commission just published last week a green paper encouraging pension schemes to have a bigger role in helping the European economy to grow through investments.”