Member Article

Capital requirements for pension schemes could threaten companies

PwC has said that proposals for pension schemes to hold extra capital against risk of unexpected events could have wide ranging impact on UK companies.

Yesterday, The European Insurance Occupational Pensions Authority published advice to the European Commission on a new regulatory framework for occupational pensions, which would require pension schemes to hold extra capital.

Significant details remain undecided, and PwC say the actual impact for companies sponsoring pension schemes could range from benign to catastrophic.

The key issue 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.

A ‘risk free’ discount rate would entail considerable more funding relative to current levels, however PwC points out that other less prudent options are feasible.

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.”

PwC suggests that if more prudent EIOPA proposals are imposed, hundreds of UK companies would be at risk of insolvency, particularly where the pension deficit dwarfs the value of the company itself.

Mr Hommel continued: “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 may also be affected by the proposals, as requirements for reserves to be set up by sponsoring employers to cover contingences could see costs passed on to pension scheme members, having a negative effect.

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.

This was posted in Bdaily's Members' News section by Tom Keighley .