Final Straw for Final Salary Schemes?

2003: Lost in Translation - Coppola

OK, so my last post was about how pensions are being made increasingly less attractive as options for building financial security and independence. As a financial planner that seeks to utlise what is available, I have to admit to having something of a "moment" when I come across things that seem to be contrary to the best interests of anyone. No sooner had I published "Pensions and the Muppet Show" when a Gonzo  the Great cannonball-like email arrived in my inbox. This time suggesting that Defined Benefit (Final Salary) schemes are likely to become extinct due to Solvency II. This initiative, was (is) meant to primarily ensure that Banks don't lend too much money and that they keep bigger reserves. Most of us would probably think this is a sensible measure. However, it has been taken a step further reports William Robins of Citywire. The National Association of Pension Funds (NAPF), the CBI and the TUC have written to  Jose Manuel Barosso, President of the European Commission. Their letter signed by Joanne Segars (NAPF), Brendan Barber (TUC) and Katja Hall (CBI) makes it clear that new proposals (from Europe) will force final salary pension schemes to make even bigger contributions. This, all three organisations agree, will lead employers to divert money that was otherwise for investment in growth, job creation and R&D. In addition the way investments are made would alter to hold an even greater proportion of low risk, low return asset classes. In addition the need to switch investment (some €3trillion) would have an immediate catastrophic impact on the stability of European financial markets. The proposals as they stand will lead to the death of Final Salary schemes and perhaps the death of a few businesses as well, many of which on paper are effectively a pension scheme with a smaller business bolted on.

Final Salary schemes are without doubt the best type of pensions available. Leaving one or not joining one is invariably not a good idea (unless you are retiring). It seems rather daft that in essence Solvency II might end up just being a raising of the bar rather than any change in behaviour by Banks. One of the main problems with European legislation about pensions is that the UK is so much further ahead (developmentally) than most European nations and as a consequence, they simply do not appreciate the implications.

This stems from the 500 page EIOPA (European Insurance and Occupational Pensions Authority) report stating that employers need to hold pension qualifications and should also hold greater reserves for operational risk. At the moment European law is actually what counts here in Britain, we have to comply.