European regulation could kill off Pension Schemes

11 March 2013

European regulation could kill off the Railway Pension Scheme – and all Final Salary Schemes in the UK.

The unelected European Commission is proposing changes to legislation that would put such an enormous burden on the Railway Pension Scheme that it could force its closure.

Long term investments and the returns they bring, known rather oddly as the “discount rate”, allow contribution rates to remain affordable in order to maintain schemes.

The amount of money expected from returns plays an important role in keeping the RPS healthy. Investments are made in all sorts of assets whether this is Government bonds, stocks and shares or property. Pension fund investors pick these different types of investments based on risk, the age profile of the scheme and the economic climate to ensure the safest and most profitable returns. These long term investments maintain the viability of the scheme.

However, the proposed changes to the Directive on Institutions for Occupational Retirement Provision would heavily restrict pension scheme investments. The proposals, known as Solvency II look to create at risk free discount rate”. Most people realise there is no such thing as a risk free investment. This would mean that European pension schemes would be forced to sell assets they think are risky (hence profitable). As a consequence the discount rate would be slashed and therefore unrealistic and unaffordable contribution rates would follow.

Less risk may sound sensible but it should always be remembered that pensions are long term investments. Risk is therefore spread over decades. New legislation simply means that pension funds must have all the money available to pay out an individual’s pension at all times even if they are not due for retirement for 40 years; consequently this cash must sit dormant making little return. As a nation we already have accounting protections for pensions, known as FRS17, so these additional EU regulations are totally unnecessary.

This will also have a hugely negative effect on the economy. Pension schemes are some of the biggest investors in Europe. If funds pull out of many investments the effect could be critical for economic recovery. We are already seeing the negative effects of austerity budgets across Europe as spending and investment is withdrawn so badly needed growth withers and dries up.

According to the National Association of Pensions Funds the measures would add a minimum of £300 billion to the cost of running Defined Benefit Schemes across the UK. In short, it would make schemes like the Railway Pension Scheme completely unaffordable.

 

Simon Weller, National Organiser, has represented ASLEF at public hearings in Brussels on this matter, and spoke against the proposals – the Dutch are opposed, the Germans are opposed, the Irish are opposed and even our own Government is opposed but because the French have a different view they and their Commissioner will attempt to push this through under the smoke screen of protecting consumers.

The visible hand of the very powerful French insurance lobby is to be seen here – trying to distort the regulations for their own competitive ends.

It’s important all our MEPs know what’s at stake for the UK pension industry so we’re asking members to write to their MEPs and ask them to oppose these measures. You can find your MEP’s details at http://www.writetothem.com/

 

Model letter:

Dear [ ]

 

Revision of the Directive on Institutions for Occupational Retirement Provision (IORP Directive)

 

I understand that the European Commission (EC) and the European Insurance and Occupational Pensions Authority (EIOPA) are currently considering a review of one of the main items of European pension legislation, the IORP Directive. The purpose of this letter is to raise my concerns relating to this review.

 

I am a member of one of 109 sections of the Railways Pension Scheme, a defined benefit pension scheme for rail industry employees in the UK. In total, the Railways Pension Scheme has around 350,000 members, of which around 85,000 are contributing members. Most sections of the Railways Pension Scheme are shared cost arrangements with 40% of total contributions being met by contributing members, including those required to meet any shortfall of assets relative to technical provisions.

 

My main concerns about the review of the IORP Directive relate to potential changes to requirements covering the calculation of technical provisions and other security mechanisms, which are referred to as the ‘Pillar 1’ parts of the IORP Directive by the EC and EIOPA. In particular, my three main concerns about the ‘Pillar 1’ proposals are:

 

1. A move to a risk free discount rate within technical provisions would lead to a significant increase in technical provisions within the Railways Pension Scheme. This would lead to an increase in both employer and member contributions due to the shared cost nature of the arrangement.

 

2. A move to a risk free discount rate would also have a significant impact on investment strategies of European pension schemes due to the expectation that these schemes would sell return seeking assets in order to avoid any mismatch relative to their technical provisions. Such a move would be detrimental to European stock markets and the European economy as a whole.

 

3. The introduction of a separate solvency capital requirement based on Solvency II rules would also lead to an increase in both employer and member contributions.

 

Although increasing the funding targets in this way might improve the safety of pension provision within the European Union (EU), the cost of doing so is likely to be prohibitive for both employers and members. I therefore consider such measures would be detrimental to the ability for future service benefits to be provided and would conflict with objectives for adequate and sustainable pensions to be provided within the EU. For example, the adequacy of retirement incomes of the contributing members of the Railways Pension Scheme depend not only on the benefits built up to date and their security, but also on both state provision and the ability for pension schemes to provide future service benefits on a sustainable basis.

 

I would be grateful if my concerns can be taken into account as part of the consideration of changes to the IORP Directive.

 

Yours faithfully

 

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