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Media Briefing Note: Anticipated EU Green Paper on pensions - a warning for defined benefit schemes

01/12/2010

LONDON, 15 November 2010 - The European Commission published a Green Paper on pensions, on 15 July 2010.  The Consultation period ends today, 15 November 2010.

The Green Paper asked for responses to various questions including:

·                     how should the IORP directive be amended to improve conditions for cross border activity?

·                     what would a solvency regime for pension schemes equivalent to the Solvency II regime look like?

·                     should EU legislation enhance protection on an employer's insolvency?

Background - Solvency II

·                     The Solvency II directive covers insurance companies and sets out the requirements for the capital they must hold to back up their liabilities.  Solvency II does not apply to DB schemes in the UK.

·                     DB schemes in the UK are subject to scheme specific funding requirements under the Pensions Act 2004.  For most UK schemes, the scheme specific funding requirement demands a lower funding level than would be required under Solvency II. 

·                     Trustees of DB schemes in the UK may invest in equities and other classes of growth assets and may factor in some anticipated growth in their investments when valuing the liabilities under their schemes. In addition, UK DB schemes are backed by a sponsoring employer and trustees are allowed to take the strength of the employer's covenant into account when agreeing funding levels.

·                     The European insurance lobby has argued for some time that Solvency II-type requirements should apply to occupational DB schemes, on the basis that this would ensure a level playing field between different pension arrangements.

Effect of increased funding requirements

Jane Samsworth, Head of Pensions at law firm Hogan Lovells International LLP said:

"Proposals to strengthen funding requirements for defined benefit schemes are not new, but they continue to be of considerable concern.  Many sponsoring employers are already contributing as much as they can reasonably afford to make good the deficits in their DB schemes.

I fear that the proposals demonstrate a failure to appreciate a fundamental difference between insurance companies and DB pension schemes: DB schemes have the support of a sponsoring employer, who remains ultimately responsible for the scheme.  As the Pensions Regulator has stated, "the best means of delivering the members' benefits is usually for the scheme to have the continued support of a viable employer".  Those of us who represent occupational pension schemes must continue to resist any ill-advised proposals that would undermine the financial stability of many sponsoring employers."

For further information on the points raised in this note, please contact:

Jane Samsworth


Partner
jane.samsworth@hoganlovells.com
020 7296 2974

Rachael Droog
PR Coordinator
rachael.droog@hoganlovells.com
020 7296 2780

 
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