British pension funds should stop living in the past and understand defined benefit pensions are dead, according to European pension experts.
The European Insurance and Occupational Pension Authority (EIOPA) has told British pension funds to stop denying that pensions are changing and to move on with controversial funding reforms.
EIOPA chairman Gabriel Bernadino delivered the message in a speech to the National Association of Pension Funds, the trade body for Britain’s workplace pension providers.
NAPF is concerned that new rules to protect pension funds will effectively end defined benefit (DB) schemes.
These pensions guarantee to pay a certain sum each year once the saver retires. The pay-out is based on the number of years the saver has paid in to the fund and their final salary on retirement or a career average salary.
Lunatics in Frankfurt
A recent report by accountants Deloitte forecasts the rules would cause FTSE100 DB schemes to surge from £1 billion in the red to nearer £2.5 billion.
“Our objective is not to kill DB but to create conditions for the future because the truth is in your country DB is already dead,” said Bernadino.
“Have some trust in what we’re doing. We are not a bunch of lunatics in Frankfurt. We know what we are doing; we know pensions. I hear it will double funding requirements and ruin the pension industry. That’s not what it’s for.
“We all do realise that in the absence of changes, in some years we may face a sudden lowering in the value of pensions for members and beneficiaries, higher concentration of costs for employers and ultimately intergenerational conflicts.
“Furthermore, the switch from defined benefit pension schemes (DB) to defined contribution (DC) schemes is an undeniable fact. Not so long time ago in January 2009, NAPF rightly noticed that in the UK more than 50% of DB schemes could close to new members as a result of the economic crisis.
Pension reforms undeniable
“This crisis surely does not help to improve situation or moods in the pensions’ world. Therefore, the need for pension systems’ reforms is undeniably justifiable.”
Bernardino also explained that EIOPA wants to see easier to understand pension documents and statements that do not hide fees and charges that can leak funds from retirement savings.
The tone of his speech was that DB pensions are unaffordable and rather than tinkering with the rules, pension providers should come up with products that are better adapted to the new world economy.
He praised auto-enrolment, which started for workers at larger employers this month, as a step forward.