Workplace pension schemes with over 12 million members could be forced to close if “destructive” new EU rules come into force, the Pensions Minister has warned.
7:00AM GMT 09 Dec 2011
The European Commission is considering introducing rules that will make the UK's 6,850 companies with final salary pension schemes pump billions of pounds into the schemes to reduce their deficits. The rules are designed to make pension schemes in EU member states more financially robust.
However Steve Webb, the Pensions Minister, warned that the guidelines from Brussels will land British companies with a “huge bill” of £100 billion. He said the high cost would force many employers to close their pension schemes for good.
“What is being done in the name of protection could mean the destruction of some of the best British pensions,” he said.
The minister also said that if companies spent money plugging their pension deficits they would have less money to invest in growing their own businesses. The rules would therefore damage Britain’s economic recovery.
“These costs could force many employers to close their pension schemes and would have a massive negative impact on growth and our economic recovery. This is a £100bn tax on growth,” Mr Webb said at a meeting in Brussels, where he is building a coalition of European countries to oppose the plan.
In defined benefit retirement schemes, an employee receives an annual payment on retirement based on his or her final salary. Although most final salary – or defined benefit – schemes are now closed to new members, an estimated 12.5 million of current and former employees still benefit from them. Most large companies - from Tesco to Unilever to Alliance Boots - have some kind of defined benefit scheme.
The EU rules under discussion are known in the industry as Solvency II. Under the EU’s thinking, reduced pension deficits would mean that pension schemes are safer and savers’ money is better protected. The combined pension deficits of final salary pension schemes run by the UK’s 350 largest private companies are currently estimated to stand at £80 billion.
However Mr Webb said that the UK already has pension protection in place through the Pension Protection Fund and the Pensions Regulator, which would effectively act as safety nets if UK pension funds ran out of money. He therefore said that the new rules “are not necessary”.
“I am determined to do all I can to ensure that this does not happen,” said Mr Webb.
Joanne Segars, the chief executive of the National Association of Pension Funds (NAPF), which represents 1,200 pension schemes, said that the EU plans are the “last thing that pension funds need”.
“These plans would ramp up costs dramatically. Businesses struggling with a flatlining economy would suddenly have to pump billions more into their pension scheme. This would mean less money for jobs and investment, at a time when the economy desperately needs both,” she said.
Ms Segars said that firms would be so badly hit by the new rules that they would “simply shut these pensions down altogether”.
“It would be a crippling blow for what is left of final salary pensions in the private sector,” she said.
The EU’s plans are currently in the discussion phase. It will set out draft legislation next autumn.
Business group the CBI has also spoken out against the proposals, branding them a “terrible idea”.