UK companies could see their defined benefit pension scheme deficits soar by £150bn to a total of £450bn under proposed changes to European Union pensions legislation, the European Insurance and Occupational Pensions Authority has revealed.
EIOPA today published the preliminary findings of the quantitative impact study it ran in eight countries to assess the impact of planned changes to the Institutions for Occupational Retirement Provision Directive.
In the UK, The Pensions Regulator calculated the impact of the plans against three scenarios using data from 6,432 DB pension schemes, with additional information provided by some of the largest UK schemes. Together, these schemes had a deficit of £300bn (350bn) at the end of December 2011.
Under the 'benchmark' scenario, the regulator found that, once the potential for sponsors to support a scheme and for Pension Protection Fund support were taken into account, this deficit would have fallen to £249bn (292bn), equal to a funding shortfall of 15%. This is based on a key aspect of the European Commission's proposals for revision of the IORP Directive, the holistic balance sheet, which aims to take into account all aspects of a scheme's funding position.
However, under the commission's plans for sponsors to hold additional capital to protect their schemes from uncertainty - the solvency capital requirement - the funding shortfall increased to 24%, or £450bn (527bn). This is calculated according to a 99.5% confidence level that the scheme will remain solvent. EIOPA noted that, if this confidence level was reduced to 95%, the shortfall would be reduced to 20%.
While EIOPA stressed the preliminary nature of the results and the need to treat them 'with caution', CBI director of employment Neil Carberry said they showed just how damaging the proposed changes could be.
'The European Commission must not ignore this warning. EIOPA's preliminary results show the impact of these proposals are even worse than expected.
'An additional £450bn cash call on businesses would damage growth and job creation, as well as destabilising financial markets.'
Towers Watson noted that the impact study's conclusions on the potential cost of the new capital requirements was broadly in line with analysis published by The Pensions Regulator last year. In October, the regulator said the likely impact of the plans was they would increase UK DB deficits by £150bn.
However, Mark Dowsey, a senior consultant at Towers Watson, stressed the uncertain nature of EIOPA's initial findings.
'These results only estimate what new EU-wide rules might do to measured pension deficits. Much of the impact would depend on what had to be done in response and within what timeframe.'
EIOPA noted that 'large variations' had been found between the results for similar pension schemes in some of the countries involved, and also big differences between individual countries according to the assumptions used in their calculations.
Pension schemes had also highlighted the 'very complex and extensive' nature of the calculations they had been expected to carry out as part of the compact study.
In light of this, it stressed that further investigation into the holistic balance sheet approach was needed, raising the potential for more impact studies to be carried out.