The power of the European Union in the pensions sphere

James Walsh, Senior Policy Adviser, workplace pensions at the UK’s National Association of Pension Funds explains why 2011 is shaping up as the year in which EU pensions policy will take huge steps forward

Strictly speaking, the European Union has no powers over pensions policy. I realise this might come as a surprise to some readers of European Pensions. After all, the EU has been heavily involved in pensions for many years. We already have an EU Directive on workplace pensions. The last few months have seen a powerful troika of European Commissioners working together on a pensions Green Paper. And a new EU-level supervisory authority for insurance and occupational pensions – EIOPA – opened for business on the 1st of January.

So, if there is no pensions ‘competence’ in the treaties that provide the legal basis for the EU, how is it that policymakers in Brussels, Strasbourg and Frankfurt are able to make such a direct impact on our sector?

The answer, of course, lies in one of the core objectives of the EU – the free movement of people, goods, services and capital. These ‘four freedoms’ form the cornerstones of the EU’s Single Market and provide the basis for EU intervention in almost any area of employment and financial services policy – including workplace pensions. And 2011 is shaping up as the year in which EU pensions policy takes a series of major steps forward.

At the heart of this activity is the European Commission’s Green Paper Towards Adequate, Sustainable and Safe European pension systems, published last July. This landmark paper – overseen by the European Commissioners for Employment, Internal Market and Economic Affairs – represents a step-change in EU pensions policy-making.

The paper surveys the full suite of pensions issues, from the demographic ‘timebomb’ to the portability of pensions across Member States to the adequacy of pensioner incomes. The scope is ambitious.

One of the key points about European pension systems is that they are all different. The sheer diversity of Member States’ traditions of pension provision means it would be impossible – and undesirable – to design a single one-size-fits-all regulatory architecture that could apply across the EU.

So it’s no surprise that so much attention has focused on one aspect of the Green Paper that raises exactly that prospect. Question 10 discusses the Solvency II regime recently introduced for the insurance sector and asks ‘what should an equivalent solvency regime for pensions look like?’. There is clearly support in some quarters for applying the Solvency II model directly to pensions.

There is, however, a formidable range of stakeholders warning of the dangers of this approach. In the UK the full range of social partners, including the CBI and the TUC, has argued that the scheme funding regime, the work of the Pensions Regulator and the backstop provided by the Pension Protection Fund already provide a robust set of safeguards for members’ benefits. Imposing a new, higher capital funding requirement would be counter-productive if it were to lead to more scheme closures and lower retirement incomes.

The encouraging news is that the debate appears to be edging in a positive direction. The European Commissioner for the Internal Market, Michel Barnier, has ruled out applying the whole of Solvency II to pensions, and he has committed to recognising the distinctive characteristics of pensions.

A balanced report from the European Parliament has also made a valuable contribution to the debate. A follow-up White Paper is expected from the Commission in September, but it appears likely that the solvency issue will be handled separately, as part of the forthcoming review of the IORP Directive. A paper setting out the Commission’s thinking on a new version of this legislation is expected towards the end of the year. Meanwhile there are plenty of other issues in the Green Paper on which the Commission can be expected to make progress. The latest indications are that it may choose to increase its focus on DC pensions. As the Green Paper notes, leaving DC scheme members exposed to all the risks is an uncomfortable position, and one that our industry should address. The NAPF shares this view; it is one reason why we are keen to see greater use of risk-sharing. We also favour the development of Super Trusts: large-scale DC schemes that would offer high quality, low running costs and good governance. This could be a fruitful area for EU scrutiny.

Whatever direction it takes over the next few months, the EU is now set on a course towards even greater involvement in pensions policy. The forthcoming White Paper and the review of the IORP Directive can both be expected to have an impact on the pension industry for many years to come.

The NAPF will be engaging closely with EU policy-makers over these issues. I would encourage readers of European Pensions to do so, too.

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