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It said the Holistic Balance Sheet (HBS) is not a sound analytical framework for assessing the strength of pension schemes, because it does not take adequate account of the complex structures of many large, multinational companies and their pension schemes.
The NAPF said the HBS fails to provide an accurate valuation of an employer’s support of a pension, particularly in complex groups and in schemes with a degree of Government support. The comments come in its response to the European Insurance and Occupational Pensions Authority’s (EIOPA) Quantitative Impact Study (QIS), which it testing the proposals of the European Commission.
The pensions body also criticised the short eight-week timeframe given for providing feedback on the Solvency II-based regulation. Many NAPF members said they did not have time to respond, and that it was prohibitively expensive to do so. One NAPF member would have faced a £15,000 bill to commission consultants to run the test.
The NAPF called for more studies to test the proposals more thoroughly.
Joanne Segars, NAPF Chief Executive, said: “This study was a good opportunity to test the EU’s proposals, but it has completely failed to do so. The Holistic Balance Sheet does not take into account the complex structures of today’s companies and pension schemes. Valuing an employer’s covenant is a new and challenging task, and we need further work to find the correct way to do this. Pension schemes were given far too little time to carry out complex calculations, and the costs involved in running them were high. This has stopped many pension schemes from giving feedback.
"The European Commission must rethink its approach. It is time to put the brakes on and it is clear that the Commission’s proposals need much more thorough testing. A new directive based on a Solvency II regime would have serious consequences for UK pensions and businesses. Imposing extra costs on pension schemes would force more of them to close, and could undermine jobs and investment at a time when the economy is struggling. The stakes are too high and we cannot rush things through.”
EIOPA’s study sought evidence on the impact of the Holistic Balance Sheet proposal, which the European Commission wants to form the centrepiece of the new EU Directive on pensions.
The QIS was carried out during an eight-week period, from 16 October to 17 December 2012. EIOPA will submit the results of the study to the European Commission (EC) early next year. The EC is set to present the first draft of the Pensions Directive in Summer 2013.
The NAPF has calculated that any new pensions directive based on a Solvency II regime could increase pension schemes’ liabilities by at least £300 billion. Facing these huge extra bills, businesses running defined benefit final salary pensions would have less money to invest in innovation and job creation at a time when the economy is in bad shape. The NAPF fears that these companies could eventually decide to close these pensions altogether.