- PwC says outcome could range from benign to catastrophic depending on key details still to be negotiated
The European Insurance and Occupational Pensions Authority (EIOPA) yesterday published its final advice to the European Commission on a new regulatory framework for occupational pensions. Little has changed from the original proposals, which if implemented would require pension schemes to hold extra capital against the risk of unexpected events.
However PwC says the actual impact for companies sponsoring pension schemes range from benign to catastrophic, depending on significant details that remain undecided, and so UK companies still have a vital opportunity to influence the outcome.
The key issue yet to be agreed is the new way for calculating the discount rate used to determine the current value of future pension obligations, against which capital adequacy will be decided. The big fear for UK companies is that a 'risk free' discount rate will be mandated, which would mean considerable more funding relative to current levels. However, PwC points out that other less 'prudent' options are also on the table.
Marc Hommel, pensions partner at PwC, commented:
"We are one step closer to fundamental reform of EU regulation governing the financing of occupational pensions. EIOPA's final advice to the EC sticks to their original plan but we are still awaiting key details which will determine the degree of damage to UK employers. The stakes are monumental and the range of possible outcomes is huge, from minimal change for most strong companies to a catastrophic hit of £500bn. UK industry has a strong interest in being at the table to influence the eventual outcome."
Companies with defined benefit pension schemes face the biggest potential consequences from the changes, and those companies where the pension deficit dwarfs the value of the company itself will be affected most. PwC estimates hundreds of UK companies are at risk of insolvency if the EIOPA proposals are implemented at the more prudent end of thinking and if limited time is given to prepare for the changes.
Marc Hommel, pensions partner at PwC, commented:
"If these reforms are implemented as drafted, it will be a case of survival of the fittest for UK companies with significant defined benefit pension schemes, but the financial position of all sponsoring employers will be weakened to some degree. We are still at an early stage in the process and UK businesses should not underestimate their abilities to influence the eventual outcome and the need to do so."
Companies with defined contribution schemes are also affected by the proposals, with proposed requirements for reserves to be set up by sponsoring employers to cover contingences. If the extra costs of funding these reserves are passed onto pension scheme members, these very measures could result in the opposite of the intent to protect people's pensions.
Another significant aspect of the proposals, which has been somewhat overshadowed, is the proposed change in the definition of cross border schemes, which will catch any employer that has cross-border employers or employees participating in their pension scheme. This matters because pension schemes that are categorised as being cross-border are required to be fully funded at all times.
The reforms will also mean annual pension scheme valuations, rather than the three year requirement currently in place in the UK, increasing costs and workload for both sponsoring companies and the UK Pensions Regulator.
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