Having been forced to pull my winter coat out of retirement this morning, I found myself questioning the cause of this unseasonal blustery weather.
So-called meteorologists might tell you it’s due to low pressure over the North Sea, but I have an alternative explanation: the force blowing our umbrellas inside out is in fact the collective sigh of relief of pension funds across Europe.
The reason for this continent-wide “phew” is the European Commission’s announcement that the draft solvency II proposals for pension schemes will not be included in the IORP (Institutions for Occupational Retirement Provision) Directive.
While the directive will contain provisions to improve the transparency and governance of schemes in the European Union, EC commissioner for internal market and services Michel Barnier said it would not cover the issue of pension fund solvency which, thanks to the diverse nature of pension systems across the EU, requires further technical work.
This is a welcome – and long-called for move as far as UK pension funds are concerned. They, along with the government, have been campaigning for this element of the directive to be dropped for as long as it has been suggested.
The consequences of introducing the rules – initially drawn up for insurance companies – would have reached far beyond the pensions industry. Forcing companies to significantly increase their capital in order to cover pension liabilities would have very quickly added up to a £500bn bill for UK employers in order to extinguish deficits and create capital buffers to meet the requirements.
The overall result, its opponents claimed, would have been a “disasterous impact on the long term economic growth and employment rate”, not just in the the UK but across the EU.
Although the EC’s decision on Thursday should be welcomed as a victory for common sense, pension funds should resist from dancing in the streets just yet, however. It is understood that the decision to delay came down to just two votes from Malta, and there is no suggestion that the rules will be scrapped permanently.
The statement makes it clear that solvency will “remain an open issue,” with Barnier stressing that there is still a “need to guarantee in the longer term a level playing field between different providers of occupational pensions”.
The commissioner insisted that the solvency rules should be an improvement for the pensions sector, rather than a punishment. If that is genuinely the goal however, the EC might be spending more time back at the drawing board than they imagined.
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