As if UK pension funds don’t already have enough to worry about, they could one day be forking out to pay benefits for collapsed schemes in Portugal, Ireland, Greece and Spain.
That is what is being proposed by a European Union green paper on pensions that has just been published by the European Commission.
At a time when the single currency is on the verge of collapse, some in Brussels want to create a pan-European pension benefit guarantee system, a pension protection fund that would cover schemes across the 27 states of the EU.
The same green paper also suggests the fund might want to compensate DC investors when their investments go sour.
The EU paper, Towards Adequate, Sustainable and Safe Euro-pean Pension Systems, starts out with the best of intentions. Shar-ing of risk makes sense and the UK’s PPF has silenced many, if not all of those who said it would never work. But there is a bewildering difference in the way pension schemes are run across the EU that would make it virtually impossible to introduce such a scheme in a fashion that is fair to all.
Different countries have different regulations and their own approaches to accrual, benefits, indexation and funding levels.
Sitting in Brussels, it is no doubt easy to see the problem. The report points out that schemes in countries where solvency requirements were lower and asset value losses particularly large as a result of the financial crisis also tend to have poorer protection of accrued entitlements and the least flexible mechanisms for burden-sharing.
But those “good” schemes in the UK already balking at having to pay out for profligate UK schemes will be incensed at the idea of having to do the same for the schemes of companies they have never heard of in jurisdictions they know nothing about.
The EU paper points out such cross-national schemes already exist in the banking, insurance and investment sectors but there are considerably more pension schemes than banks.
Furthermore, the extent to which countries rely on private sector pensions varies hugely, so those with more state pension and less private pensions have most to gain by the plan. The UK stands at the bottom of the table when it comes to state spending on pensions, with just 6.6 per cent of GDP to our retirees.
That is less than half the 14 per cent the Italians pay, substantially less than the 10.4 per cent in Germany and barely two-thirds of the EU average of 10.1 per cent. Yet the size of our private sector pensions means despite our parsimonious state pension, retirees in the UK are not the poor men of Europe.
Our old age income poverty rate, which is the percentage of over-65s with income of less than half median earnings, is, at 10.3 per cent, virtually on a par with Germany’s 9.9 per cent, according to OECD figures. We may criticise private pension saving in the UK but it is something to be treasured and we should be wary of it being lumped in with the rest of the EU.
Perhaps the most astonishing idea is that the fund could be used to “compensate excessive losses in DC schemes”.
It is true that many savers have seen their retirement plans shattered by the savage shocks of the last two years, and some states’ investors have fared worse than others. Ireland’s pension funds, for example, were the worst hit in 2008, falling by 37.5 per cent over the year, according to the OECD. And taking risk out of DC accrual should be a goal that providers and government should work towards.
But if ever a proposal were designed to promote risky investment, an EU fund to compensate those whose portfolios do badly fits the bill.The Germans are already paying to keep Greece from going bust. UK pensioners will not want to do the same for their Continental counterparts.
John Greenwood is editor of Corporate Adviser