European pension regulation:
the ending of retirement and the political economy of USS

Number 42: #USSbriefs42

USSbriefs
USSbriefs
Aug 16, 2018 · 8 min read

Carlo Morelli, University of Dundee

Click for printable PDF

This is a USSbrief, published on 16 August 2018, that belongs to the OpenUPP (Open USS Pension Panel) series. It was submitted to the UCU-UUK JEP (Joint Expert Panel) by the author and appeared on the UCU Left website on 14 August 2018.

European Union and the end of Defined Benefit pension provision

We need a more European approach to tackling challenges to pension systems, in line with successive conclusions of the European Council which have called for closer economic policy co-ordination. It is now time to act and to implement in a decisive manner the actions put forward in this White Paper. (COM, 2012, p. 15)

As part of these changes to retirement a single market for Private Pension Plans (PPP) has been a stated goal, in which pension provision can be made portable as labour moves across national boundaries. The development of a European market for non-guaranteed Defined Contribution (DC) pensions has therefore been progressed through the regulatory body the European Insurance and Occupation Pension Authority (EIOPA). The ending of guaranteed Defined Benefit (DB) pensions is an explicit requirement for this approach. Rather than encouraging guaranteed pensions as a means to secure a retirement free from poverty, DB — guaranteed pensions — are in this view seen as an impediment to this new market for pensions. As made evident in the EIOPA 2013 report Towards an EU single market for personal pensions: An EIOPA Preliminary Report to COM, on potential changes, the ‘main rationale’ for launching the initiative on personal pensions included the need to ‘adapt the regulatory framework to the general shift towards individual responsibility for securing retirement income (DB to DC)’ (para 3, p.4). However, one of the main limitations was the continuation of guaranteed pensions. Thus: ‘Most stakeholders do not think that it is feasible to create a cross border framework for PPPs with guarantees’ (2013, para 205, p. 42 original emphasis). Differences in tax legislation and contract law across EU states involve higher costs, and hence lower profits, for pension companies engaging in insurance-type, guaranteed pension transfers and therefore make capital transfers a less desirable activity. As EIOPA note, it is ‘costly for insurance companies and might in consequence hinder them from offering their products on a cross border basis’ (2013, para 16, p. 33). In contrast, however, for non-guaranteed, DC pension provision, EIOPA concluded that ‘EIOPA believes a strong case is made for a future Directive that would establish a single market for PPPs inter alia through the alignment across the EU of PPP holder protection measures’ (2013, para 221, p.45). For pension companies, non-guaranteed, individual pension savings allow for capital transfers, across national boundaries between organisations, owing to the lack of future risk to those institutions receiving the capital transfer. It also facilitates increases in profits for transfers through additional commissions and charges. In the single market for pensions under construction, non-guaranteed pensions result in investment risk, higher charges and longevity risk all being borne by the individual not the pension company.

This evolving European framework for pension provision has therefore been a significant factor in the reinforcing of the drive towards the replacement of DB pensions with DC pensions. The DC pension market is a market where high commissions and profits can be created, at the expense of the individual seeking a secure future pension. In the UK, this process has been underway for more than two decades and has been developed through the creation of artificial deficits. A key component in this process of constructing deficits has been through the choice of discount rates. In the UK, particularly, conservative discount rates have been chosen to value long-term pension sustainability as a means to motivate the change from DB to DC.

Discount rates

Source: European Insurance and Occupation Pension Authority (EIOPA) (2017). Stress Test Report 2017, Frankfurt 13 December, EIOPA-BoS-17/370. Figure 3.4.

Decision on the discount rate is then the main driver of any surplus/deficits of assets over liabilities. Note again that the UK, with one of the highest deficits of assets to liabilities, has amongst the most conservative discount rate in the EU (see figure 3.15 below). As EIOPA note, ‘this is mainly caused’ (2017, p. 27) by changes in the discount rate and resulted in the UK having the third lowest number of open DB schemes in the EU, behind Italy and Ireland (2017, Figure 3.19, para 99, p. 29).

Source: European Insurance and Occupation Pension Authority (EIOPA) (2017). Stress Test Report 2017, Frankfurt 13 December, EIOPA-BoS-17/370. Figure 3.15.

Summary

USS choice of discount rates

The Joint Expert Panel

Bibliography

European Insurance and Occupation Pension Authority (EIOPA) (2013). Towards an EU single market for personal pensions An EIOPA Preliminary Report to COM, Frankfurt, EIOPA-BoS-14/029.

European Insurance and Occupation Pension Authority (EIOPA) (2017). Stress Test Report 2017, Frankfurt 13 December, EIOPA-BoS-17/370.

This is a USSbrief, published on 16 August 2018, that belongs to the OpenUPP (Open USS Pension Panel) series. It was submitted to the UCU-UUK JEP (Joint Expert Panel) by the author and appeared on the UCU Left website on 14 August 2018. This paper represents the views of the author only. The author believes all information to be reliable and accurate; if any errors are found please contact us so that we can correct them. We welcome discussion of the points raised and suggest that discussants use Twitter with the hashtags #USSbriefs42 and #OpenUPP2018; the author will try to respond as appropriate. This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

USSbriefs

A set of papers written by University Staff and Students…

USSbriefs

A set of papers written by University Staff and Students, on University Staff and Students, for University Staff and Students. We are also on https://ussbriefs.com/

USSbriefs

Written by

USSbriefs

A set of papers written by University Staff and Students, on University Staff and Students, for University Staff and Students.

USSbriefs

A set of papers written by University Staff and Students, on University Staff and Students, for University Staff and Students. We are also on https://ussbriefs.com/

Medium is an open platform where 170 million readers come to find insightful and dynamic thinking. Here, expert and undiscovered voices alike dive into the heart of any topic and bring new ideas to the surface. Learn more

Follow the writers, publications, and topics that matter to you, and you’ll see them on your homepage and in your inbox. Explore

If you have a story to tell, knowledge to share, or a perspective to offer — welcome home. It’s easy and free to post your thinking on any topic. Write on Medium

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store