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MEDDLING European bureaucrats are threatening to kill off

Britain’s final salary pension schemes.

They want to impose tough financial rules on them that would cost up to £600 billion.

But few employers would be able to afford the terms and most would be forced to close the schemes, according to experts.

The so-called Solvency II rules, which would affect about 6,400 workplace schemes in Britain, are designed to bring them into line with other European countries.

But economists are warning that “one size does not fit all”. The National Association of Pension Funds says the “unbearable” financial burden could lead to the closure of every final salary – or defined benefit – scheme in Britain.  

Speaking ahead of the association’s conference, its chief executive Joanne Segars warned: “These proposals would kill defined benefit pension schemes.  They would add a minimum of £300 billion to the cost of running them. It is a hell of a lot of money that employers do not have. The cost would leave companies with little choice but to close the schemes.”

Paul Dixon of Census Financial Planning, said: “What’s being proposed by Brussels could blow the pensions landscape apart.  If Solvency II rules are forced upon defined benefit pension schemes, they would be required to hold sufficient assets to cover the cost of buying an annuity for every scheme member at all times.  If this cash isn’t invested for growth then it could put back the economic recovery.  The result will be more companies forced to close their final salary schemes or forced into insolvency.”

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Bottom of FormPensions Minister Steve Webb is set to warn the conference, which will be attended by European Union officials as well as pensions experts, of the dangers of the Solvency II guidelines.

About 2.4 million Britons currently save into gold-plated final salary pension schemes, where a person’s retirement income is based on their final or average salary. The pensions are largely paid for by the company.

Although employers are increasingly switching their schemes to cheaper so-called defined contribution plans, in which pay outs are based on contributions from both employer and employee, final salary schemes still make up a significant portion of UK pensions.

Michael Brown, of Gallagher Employee Benefits, said EU policy makers were “on a different planet”.  He said: “UK pensions are heavily regulated and rightly so. Solvency II may be the last nail in the coffin for many employers with the only solution being insolvency with a much bigger economic impact that will certainly not help the UK’s finances.”

A European Commission spokesman said it would carry out an “impact study” before any proposal, due this autumn, was made.

Speaking at a public hearing last month Michel Barnier, the European commissioner responsible for internal market and services, acknowledged the “concern” over possible regulatory changes, but he also said there was a need for “robust rules” to protect pensioners”.

Hugh Savill, director of Prudential Regulation at the Association of British Insurers said: “It is irresponsible of the NAPF to say that Solvency II will cause the closure of defined benefit pension schemes and cost companies billions of pounds.  It is designed for insurance companies, which the European Commission have said that they will not ‘copy and paste’ on to pension funds.  It is important that a proper impact assessment is conducted on the cost to companies and pensioners of any new regulation and that this impact assessment is used to inform any changes.”

April 2012 Home

Final Salary Pensions