United Kingdom: Brussels raises pressure on pension plans

By Alison Steed, the Telegraph

December 22, 2003



Occupational pension schemes in Britain face a major threat from European Union legislation, which could force even more schemes to close, the National Association of Pension Funds has warned. 

New EU rules, which must be implemented within the next two years, will force occupational schemes to be fully funded at all times, only allowing underfunding for a "limited", as yet unspecified, period. It means that companies will have to be able to meet all of their pensions’ liabilities at any time, putting much greater strain on resources.

Christine Farnish, the chief executive of the NAPF (National Association of Pension Funds), said this could have a "huge consequence" for British company schemes. She said: "The UK has to implement this directive. Continuing to provide a defined benefit pension is a hugely costly undertaking for any supervising employer.

"We know a number of firms have closed their schemes to new members but our concern is that greater numbers will also close to future accruals because of these extra costs. It is unquantifiable, and finance directors do not like having that sort of risk on their balance sheets.

"It is very dangerous and very costly to UK schemes, and because the rules cannot be scheme-specific, will no doubt lead to endless battles in the courts. It is ridiculous; it is not in the real world."

The NAPF has already seen 7pc of schemes close to new accruals - where existing members of the final salary scheme are no longer allowed to pay in and pension benefits from that scheme are frozen - in the past year. This is up from 1pc the previous year. Another 8pc of scheme managers have said they are considering taking this action. One in four companies have closed their final salary schemes to new members in the past year, the NAPF said.

A spokesman for the TUC (Trade Union Congress) said: "We will be studying this proposal in detail. Any proposal for ensuring pension scheme funding must concentrate on the real long-term liabilities, not the day-to-day movements of investments." The Department for Work and Pensions has been consulting with the industry about the implications of these new rules, which should be included in the upcoming Pensions Bill.

Its publication is expected in January, according to the DWP, but has already been delayed for a number of months. Ms  Farnish said she does not expect the Bill "before late January at the earliest." The EU directive 2003/41/EC "on the activities and supervision of institutions for occupational retirement provision" will come on top of extra costs faced by occupational schemes because of pension changes already planned.

The Pension Protection Fund, essentially a safety net designed to catch those who lose out if their scheme is wound up without enough money to meet its liabilities, will be funded by a levy on occupational schemes. In addition, a new pensions regulator, which will replace the Occupational Pensions Regulatory Authority, set up along the lines of the Financial Services Authority, will also need to be paid for.

Ms Farnish added: "The Government needs to think long and hard about what it wants to see in this country."

A spokesman for the DWP (Department for Work and Pensions) said: "We can take into account the view of people affected by this, and people who have an interest in how the directive will affect them. I am sure the NAPF will have made their concerns known to us. We will take them on board."

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