By Fiona Tait, Pension Specialist, Royal London
Here are some selected examples of each.
1. Directives and policy
Sustainable pensions
In 2012 the EU published a white paper “An Agenda for Adequate, Safe and Sustainable Pensions”, the purpose of which was to “ensure that pensions in Europe remain adequate as society grows older”. This led to recommendations for Member States to raise retirement ages, promote longer working lives and encourage private pension savings. In the UK we have of course seen increases in the UK State Pension Age and the introduction of automatic enrolment which mirror this agenda.
IORP I & II
The aim of IORP - the EU Pensions Directive governing Occupational Pension Schemes - was to ensure better protection of member benefits by improving Scheme Governance, member communications, investment strategy and transparency. This influenced the development of the TPR’s Codes of Practice and more recently the introduction of Independent Governance Committees, undoubtedly a positive result.
Solvency II
The aim of solvency II was obviously to ensure adequate funds are available when scheme members need to take their benefits, however the original proposals have been significantly altered and implementation delayed several times as Member States struggle to comply. Solvency II has particularly affected annuities and the knock-on effect for final salary schemes is that buy-outs have become more expensive making it difficult for employers to continue to offer the same level of guarantees. The UK might well be glad to go their own way on this one.
Financial Markets Review
This of course led to the Retail Distribution Review, bemoaned by many advisers. On the plus side advisers are now undoubtedly better qualified and the cost of advice is clearer to the consumer but the fallout included a significant reduction in the number of financial advisers, and the necessary introduction of guidance services.
2. Court cases
The Barber v GRE (1990) case is primarily remembered as a victory for sex-equality, since Mr Barber asked for, and received, a pension which was calculated on the same basis as that of a female worker who could have retired earlier.
Of greater significance though is the clear basis upon which this decision was made – pensions are deferred pay. This meant they were covered by the Equality Act but also that where benefit promises are made employers have an obligation to honour them. It also led to employers having to cover the considerable cost of equalising all pension rights from the date of the ruling.
In 1994 the ECJ ruled in the case of Preston v Wolverhampton Healthcare that since many more women than men work part-time, excluding part-timers from pension scheme membership could be deemed to be sex discrimination. It is now law that part-timers must be offered the same access to pension schemes as full-timers.
In Fuchs and Kohler v Land Hessen (2011) and subsequent cases the ECJ determined that setting a compulsory retirement age for their scheme is not age discrimination so long as it could be objectively justified, for example in order to maintain a balanced age structure within the company or to prevent individual disputes over fitness to work. Setting a compulsory retirement age merely in order to reduce employer costs is not in itself sufficient justification.
One of the decisions that may not have been enforced in the UK had we not be part of the EU was the Test Achat case (2011). The UK government of the time were of the opinion that so long as they were based on statistical evidence gender-based insurance rates should be allowed, but following Test Achat complied with the ECJ ruling that the exemption should be removed. Given the much higher proportion of male over female annuitants it was no surprise the annuity rates did not improve after this either.
So…
Thanks to Europe we have stronger member protection, more sustainable pensions and much more member equality. On balance it seems likely that most of this would have happened anyway, albeit possibly more slowly. Going forward I don’t believe much, if any, of this will be unwound however it will be interesting to see if the UK continues to follow a similar pension policy to Europe.
Clearly we will no longer be subject to ECJ decisions however with the same demographic and economic challenges as the rest of Europe we are likely to face the same difficult policy decisions.
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