The European Commission (EC) wants to impose pension changes that would cost UK businesses £350bn (€440bn) and 180,000 jobs, according to research commissioned by the Confederation of British Industry (CBI).
Describing the proposed reforms as “a disaster” for British business, the CBI’s analysis by independent economic consultancy Oxford Economics, also said the changes would cut long-term growth by a potential 2.5% and reduce the value of pensions.
The EC’s new funding regime would force employers to divert hundreds of billions of euros into defined benefit schemes.
Pension schemes would need to be run by individual employers to operate in a similar way to proposed changes for insurance firms, which means they would have to hold enough funds to pay out in the event of a ‘once-in-200-year catastrophe’.
In October, Grant Thornton warned that pensions remained the “biggest strategic issue for the food industry”.
‘Economic outlook is so fragile’
CBI chief policy director Katja Hall said: “Imposing £350bn more costs on business would be a disaster for the economy and for pension saving. The long-term economic outlook is so fragile and uncertain that it is crazy to entertain proposals that would cost jobs and cut so deeply into our long-term growth.
“Workplace pension schemes are vital to ensuring people have enough money for their retirement when life expectancy is rising – so future generations are not hit with huge bills or driven into poverty. The EC’s wrong-headed proposal will do nothing to help us cope with the burden of retirement.”
Expressing “extreme concern” over the EC’s proposed changes, the CBI said pension liabilities fall over many years as workers retire over time and can call on additional funds from employers if needed.
Firms would be forced to cut jobs
It claims firms would be forced to cut jobs and pass costs onto customers and employees to meet the extra demands from Brussels.
UK pensions already have robust regulation to ensure employers have set aside enough money to cover long-term costs, according to the CBI. They are guaranteed by businesses and have a robust safety net from the Pension Protection Fund.
Hall said: “We have a tough regulatory system in this country so these changes are completely unnecessary. It’s alarming that the Commission is still turning a deaf ear to calls from businesses, trade unions and pension funds to bin these proposals.
“The EC must leave individual EU members to deal with their own retirement saving systems, as they do at the moment – rather than imposing a new system from the centre.”
The report, ‘The economic impact for the EU of a Solvency II-inspired funding regime for pension funds’, outlines the “significant damage” that an insurance-inspired solvency regime would cause. The problems include:
- UK business funds would be burdened with an additional £350bn, which is equivalent to an additional 7.9% of affected firms’ total employment costs for each of 10 years.
- Gross Domestic Product (GDP) would be 2.5% lower in the mid-to-late 2020s than it would have been in the absence of any regime change and would still be 0.6% lower than otherwise in 2040.
- Business investment would be 5.2% lower than otherwise in the mid-2020s, with a shortfall of 1.4% still being felt in 2040.
- The average loss of GDP over the period 2022–40 would be 1.5% and, with the business sector capital stock 1.8% smaller than otherwise in 2040, the path of GDP and productivity would remain weaker than otherwise going forward from there.
- Export volumes would fall short by 2.1% in the mid-2020s due to reduced cost competitiveness, with subsequent revival dependent on currency depreciation and an associated squeeze on the typical household’s spending power.
- Employment would fall short of where it would have been otherwise by 0.5% or in 180,000 in the mid-2220, with subsequent revival dependent on an additional squeeze on real wages.
- In the face of these pressures, consumer spending would be 2.0% lower in real terms in the late 2020s than otherwise, with a shortfall of 1.4% still in place in 2040.
- Likely changes to investment portfolios would also lead to lower financing for growing businesses.