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October 18, 2011updated 13 Apr 2017 8:47am

Solvency II regulation for pensions faces opposition from business

This warning comes from the Confederation of British Industry (CBI), the UKs biggest business organisation, in a call on the British government to resist plans by the European Commission (EC) to treat defined benefit pension schemes as insurance contracts.

By LII editorial

Introduction of regulation of defined benefit pension schemes based on the Solvency II regime for European insurers would be a disaster for the UK’s economy and sponsor companies. This warning comes from the Confederation of British Industry (CBI), the UK’s biggest business organisation, in a call on the British government to resist plans by the European Commission (EC) to treat defined benefit pension schemes as insurance contracts.

Speaking at the CBI Pensions Conference in September, CBI chief policy director Katja Hall said: “The proposal is a terrible idea, based on a wrong-headed insistence that defined benefit schemes are the same as insurance contracts.

“The potential effects are very significant, and would massively undermine the government’s economic goals.” She continued: “We need the UK government to step up to the plate in Brussels and stop the imposition of insurance-style solvency standards on defined benefit pension liabilities. The government can do a lot more than it has to date.”

If the EC’s proposals were to be implemented as they now stand it could result in total UK defined benefit pension schemes’ liabilities increasing by up to £500bn ($780bn), said Hall.

“That’s money that will have to be paid by the schemes’ sponsoring employers,” she stressed. “This will divert money away from business investment in growth and jobs at a critical time, and harm prospects for investment in infrastructure.”

To comply with the EC’s proposed regulations, Hall said that defined benefit pension across the European Union (EU) would be required to sell listed shares worth £800bn.

“With the volatility that we have seen in international money markets, pension funds piling into more secure government bonds would push down yields and create even more pressure on sponsors as investments fail to deliver,” said Hall.

About 40% of total EU pension scheme assets of £2trn are held by schemes in the UK. Hall concluded there is “no reason” for proposed regulatory changes, arguing there is already sufficient protection for scheme members, proven during the economic crisis.

Hall said: “We have told the commission [EC], trade unions have told the commission, the pension funds have told the commission. But they don’t want to listen.”

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