In Depth: How much will EU pension proposals cost?

Estimates of how much UK companies may have to pump into their pension schemes under a revamp of pensions regulation being considered in Europe are speculative as it comes down to how the rules are introduced, according to JLT Pension Capital Strategies.

The European Insurance and Occupational Pensions Authority’s (Eiopa) review of the Institutions for Occupational Retirement Provision (IORP) Directive has proposed the application of a ‘Solvency II type capital regime’ to assess the solvency of pension funds to enhance the security of occupational pensions across EU member states.

Under this system, which has been designed for insurance companies, pension funds would be required to increase their funding levels, making the provision of pensions much more expensive. This would lead to employers paying more at an already difficult economic time, leaving them with less money for investment and job creation.

Steve Webb, pensions minister, attacked these proposals last month, stating that they would cost British industry £100m and could mean that companies walk away from final salary schemes. However, it seems Mr Webb is taking an optimistic approach as the Association of National Pension Funds (NAPF) has estimated this could cost £300bn, JP Morgan Asset Management estimated £600bn with JLT Pension Capital Strategies estimating this could cost a whopping £1,000bn.

Charles Cowling, managing director for JLT Pension Capital Strategies, admitted that the pension proposals from Europe, looking to make members’ benefits absolutely safe and guaranteed in all circumstances is a “laudable aspiration”, but warned that absolute guarantees are “very expensive - particularly in current nervous market conditions”.

Mr Cowling emphasised that there are lots of “different ways of measuring” the funding position of UK pensions schemes, citing that looking at the “insurance company buy-out basis” is one way of measuring it.

He said: “This means what it would cost a pension scheme to go to the market and say if they take liabilities off what will that premium be. On that measure, the order of £1,000bn pension scheme assets against £1,800-1,900bn of pension scheme liabilities means there’s a difference of £800-900bn.

“The current funding difference is £800-900bn but on top of that Solvency II will be introduced for pensions in the same way as insurers. They have a financial entity that will survive shocks – a system for if financial markets went into free-fall, solvency capital requirements on top of assets for liabilities.”

Mr Cowling emphasised that the main point is that if new rules are introduced, the question will be how much firms will be required to do this.

He pointed out that it could be argued that the EU directive could consider how much the employer is worth, and count this towards the solvency capital requirements.