Occupational pension funds are warning against new European Union-wide requirements that would oblige them to hold more cash. Such a measure will prove financially crippling for employers and bring an end to final-salary schemes, they say.

They are urging the European Commission and the European Insurance and Occupational Pensions Authority (EIOPA), the pan-EU regulator, to recognise the risks in imposing disproportionate burdens on workplace-based schemes.

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On 15 February, EIOPA is to send the Commission its formal advice on a planned revision of the 2003 directive on Institutions for Occupational Retirement Provision (IORP). The directive sets prudential standards for occupational pensions – schemes that rely on contributions made by employers towards future pension entitlement of their employees – and lays down minimum standards, including the type of investments that funds can make.

Under the revision, the Commission is seeking to force occupational pension funds to avoid risky investments and to hold larger cash buffers to guard against market volatility, as the Solvency II directive requires of the insurance sector. However, occupational pension fund representatives and some economists have warned that the Solvency II model will be too expensive for employers, who will close the schemes down.

The Commission’s plans – which are expected to emerge as a legislative proposal towards the end of this year – are opposed most strongly in Belgium, Ireland, the Netherlands and the UK, which have a tradition of defined-benefit or final salary pensions. Concerns have also been raised in Germany in respect of its multinational companies that operate in countries with such pension traditions.

Industry’s concerns

Matti Leppälä, the secretary-general of the European Federation of Retirement Provision (EFRP), said he was “seriously concerned” about the plans. Pension funds were not against risk-based supervision, but they oppose Solvency II-like risk-based capital requirements, he said: “They can be detrimental to pension funds and to providing good quality pensions in the future.” 

He said there were differences between insurance companies and pension funds. “They should have a different legislative framework and they should be able to take risks in different ways,” he said.

James Walsh, senior policy adviser at the UK’s National Association of Pension Funds (NAPF), warned of the “dramatic impact” of the proposals.

“They will make it even more expensive to run these schemes and many will close down,” he said. The NAPF has estimated that the plans could cost employers an additional €350 billion in the UK alone. “Employers will have to dig much deeper,” he said. “This plan will increase the risk of those employers becoming insolvent and that’s not good for the economy or employees. It will lead to less money being available for investment in the economy.”

Michel Barnier, the European commissioner for the internal market, has sought to allay fears that occupational pension schemes are under attack. A Commission spokeswoman said that it would not be a case of “copy and paste” of Solvency II rules and a full impact assessment will take place.

“In our revision we will look at the substance of the pension promise, which is, in most cases, different from an insurance contract,” the spokeswoman said.