14th February 2012
Pensioners in the UK could be hit by a 20 per cent cut in their incomes if planned new European Union capital rules for pension funds go ahead, Conservative MEPs are warning.
The EU is finalising its proposals for solvency capital requirements for the insurance and pension industry with the aim of making the industry financially robust and able to withstand any future financial crisis or stressed market.
The proposals could have unintended consequences and force insurance and pensions funds to hold millions of pounds in extra capital to take into account short-term market volatility, even though they are not exposed to it. Industry experts predict this would lead to a massive hike in premiums - or an equally severe collapse in pension values as insurance companies would not be able to absorb this extra cost.
The UK Government and Conservative MEPs are trying to avert the crisis by amending the proposals to recognise the specific nature of annuity pension investments in Britain, which rely heavily on long-term and low-risk financial instruments. They are held to maturity for a fixed income and therefore are not affected by market volatility.
I am the Conservative negotiator on the proposed measures and if we do not get this legislation right insurance companies will be forced to hold millions in extra capital to cover themselves against a risk that does not exist.
Our pension companies and company pension funds operate differently from those in most other EU countries. UK annuity products mean that the consumer cannot withdraw the cash, so there can be no 'run' on these products, as is a danger in other countries. As returns on these long term investments are guaranteed, the only risk is that the issuing company will default. In addition the pension companies know exactly when they will mature and release cash into their funds.
They are not dependent on the fluctuations of the markets or the wider economy as funds are in France or Germany.
As negotiations over Solvency II continue we will be asking all parties to see sense and to allow for a package of discount rates that ensure that insurance companies across the EU do not have to hold extra capital to avoid potential risks they are not exposed to. Otherwise pensioners will be hit hard, responsible companies running currently-healthy pension schemes will be made unprofitable and the few remaining final salary schemes will be driven off the face of the earth.
The extra financial burden could even push struggling companies under.
This legislation had the sole aim of strengthening the industry to protect consumers. I will continue to work hard to ensure this is what we achieve.