CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1911 -i

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Work and Pensions Committee

EU Pension Policy

Monday 26 March 2012

Maggie Craig, Neil Carberry, Matti Leppälä, Joanne Segars OBE and Nicola Smith

Evidence heard in Public Questions 1 - 64

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Work and Pensions Committee

on Monday 26 March 2012

Members present:

Karen Bradley (Chair)

Andrew Bingham

Sheila Gilmore

Glenda Jackson

Brandon Lewis

Stephen Lloyd

________________

In the absence of the Chair, Karen Bradley was called to the Chair

Examination of Witnesses

Witnesses: Maggie Craig, Director of Financial Conduct Regulation, Association of British Insurers, Neil Carberry, Director of Employment and Skills Policy, Confederation of British Industry, Matti Leppälä, Secretary General, European Federation for Retirement Provision, Joanne Segars OBE, Chief Executive, National Association of Pension Funds, and Nicola Smith, Head, Economic and Social Affairs Department, Trades Union Congress, gave evidence.

Q1 Chair: Thank you very much, everybody, for coming. I must explain that I am chairing the meeting because our Chair is currently not well and unable to be here, so I am the acting Chair. Please forgive me if it is not quite as well chaired as you are used to, but I will do my best. Perhaps if you could all introduce yourselves for the record and then we will get started.

Neil Carberry: Neil Carberry, Director of Employment Policy at the CBI.

Maggie Craig: Maggie Craig, Director of Financial Conduct Regulation at the ABI.

Matti Leppälä: Matti Leppälä, the CEO of the European Federation for Retirement Provision in Brussels.

Joanne Segars: I am Joanne Segars; I am the Chief Executive of the National Association of Pension Funds.

Nicola Smith: I am Nicola Smith; I am Head of the Economic and Social Affairs Department at the TUC.

Q2 Chair: I must also apologise for the fact that we are quite short on numbers. It is of course the final day of the Budget debate and many of our members are keen participants in that debate. That is why we are slightly lower on numbers than perhaps normal.

The meeting today is to discuss the EU proposals on pensions and the impact that they would have in the UK. The Committee visited Brussels in December 2010 and we were briefed at that point as to the process and the progress, but it would be very helpful to us if perhaps you could tell the Committee why the application of Solvency II to occupational pension schemes would be so detrimental to the UK.

Neil Carberry: Broadly, there are two effects that we would need to take into account. The first is that if you fully apply pillar 1 of the Solvency II Directive to pension funds it would have an immediate cash impact on sponsors of defined benefit schemes in the United Kingdom. Numbers in this sphere are famously fungible according to the assumptions you use, but it is not unreasonable to say we are certainly thinking in the multiple hundreds of billions of pounds of total liability increase. That clearly has an immediate negative impact on the sponsors of schemes, both in terms of closure of any remaining accrual, and in terms of the position of the company sponsoring the scheme. Indirectly, it also raises the possibility of additional claims on the PPF1 and therefore the burden on the PPF rising, and a situation in which the PPF is less able to sustain itself via the levy payment would be likely. So the first effect is a significant impact on sponsors.

The second one is that, at such a time when these schemes become funded to the level of the solvency capital requirement from Solvency II, you would then see a significant move to more risk-averse investing by the pension schemes in question. Those schemes would likely move into government security-certainly here in the UK-and the very highest quality corporate bonds; there would be far less investment in equity and other corporate bonds, which is likely to have a significant effect on capital markets.

Joanne Segars: To add to those points, we have done some calculations amongst our own members of the immediate impact that the application of Solvency IIlike rules would have on UK pension schemes. We calculate those additional costs, or the additional impact on liabilities, to be around £300 billion. That is just to take schemes up to the technical provision, so that is just to fund the additional costs of those liabilities, so the cost is immediate and very, very real. JP Morgan has estimated that to take full account of the holistic balance sheet costs on pensions would be £600 billion. That is to take up to the technical provisions and the additional funding buffers on top; there are very, very significant costs. However, as Neil Carberry has said, there will also be impacts on the real economy too, as pension funds will be forced out of equities, and we have already seen a huge disinvestment by occupational pension funds from equities-UK equities in particular-into fixed interest and bond markets.

Our fear would be that the impact of pension funds suddenly having to pile into bonds would be a further downward pressure on bond yields. We have already seen, and our analysis has shown, that the impact of QE2 over the last few months has already added £90 billion additional to the cost of pension scheme deficits. If we were to add that in, too, there would be very significant costs. These costs will come at a time when, frankly, pension funds and the sponsors of those pension schemes would rather be investing in their companies, would rather be investing in jobs and growth. We fear that there would also be an impact on jobs, growth and economic recovery-not just here in the UK, but across Europe too.

Maggie Craig: I would agree with what both Neil Carberry and Joanne Segars have said. It is also important to recognise that in the UK we have something quite different in terms of employer-sponsored occupational schemes. On mainland Europe, there are instances where insured schemes and employer-sponsored schemes are very similar or are in competition. That may help people understand perhaps why this idea has come up, but we do not have that in the UK. We have employer sponsored schemes, a regulator who is willing to step in, funding standards and a Pension Protection Fund. To import an additional level of burden with all the knockon consequences as outlined by my colleagues would not be good.

Q3 Glenda Jackson: On the point that you made, Ms Craig, on the safeguards as far as this country is concerned, they are quite recent safeguards, aren’t they? How did we do before, and what is the kind of return as far as Europe is concerned, given that they have such a different structure?

Maggie Craig: Joanne is probably better placed to give you the history of it than I am, but in the UK there has been a history of defined benefit schemes having to meet certain funding standards. Those have changed and have been strengthened over time. The Pension Protection Fund is, as you say, a fairly new animal, as is the Pensions Regulator, so there are safeguards there. Sorry, the other part of your question-I am sorry, Ms Jackson?

Q4 Glenda Jackson: Is there a comparable difference? You have painted a very bleak picture of what the kind of return would be if this came into being in the United Kingdom, but presumably this is a system that is already running in Europe. Is that replicated there?

Maggie Craig: Pensions in Europe are very different; employer-sponsored schemes in Europe are very different. The systems are not comparable at all. Indeed, I do not think that Solvency II applies to European pensions at the moment.

Q5 Chair: Perhaps, Mr Leppälä, you can give us a European perspective?

Matti Leppälä: Yes, Madam Chair. Indeed, the pension systems are very diverse in Europe and it is very difficult to compare them in any particular detail, but the member states widely share the concerns voiced here for the same reasons: the increased capital requirements for pension funds or other institutions of occupational retirement provision (IORP) are very difficult. The assessment is very dependent on what has been considered. For example, in the Netherlands the additional capital could be somewhere between 5% and 50%, depending on the assumptions-whether, for example, conditional indexation is within or left outside these provisions. Also, in Germany up to 50% of additional capital would be required. There is great concern all around, across Europe, for various reasons, but the main message is the same, that you should not pull capital away from companies, and it is a false sense of security if you increase capital requirements. That is away from the growth and employment that is really important for Europe.

Nicola Smith: I just wanted to say in response to your first question that I agree with the analysis of Neil and Joanne as to the impact that applying Solvency II to UK defined benefit (DB) pensions could have. Our worry is firstly that, as Neil set out, the increased capital requirements arising from the application of this Directive would lead to high costs for employers, but also undoubtedly for employees, who would face the likely requirement of higher contributions themselves, reductions in the benefits they were able to get from the pension scheme, or in many cases the likely closure of the defined benefit scheme that they were in, which would leave them with no access to occupational pension provision in retirement or to higher-risk defined contribution provision when they reach retirement. We also share concerns about the likely change in investment strategies that pension funds would have to follow in response to this Directive. I would like to emphasise the impact that would have, not only for growth in the wider economy but specifically for job creation, which, at a time when unemployment is so high and when there is no real prospect of our job creation levels even returning to prerecession levels for several years, is clearly not something we can risk.

Q6 Chair: I suppose this may be a very silly question, but is there anything within Solvency II that could be remotely helpful in the UK?

Joanne Segars: There may be some things in the proposed revisions to the Directive that could be quite helpful. The starting point for the Directive itself, which is security, adequacy and sustainability, are principles that certainly we at the NAPF-and I am sure all the witnesses here-absolutely agree with. Our concern is the Commission’s proposed method of going about it would have exactly the opposite effect, and Nicola has outlined what they are quite clearly. From our perspective at the NAPF, there are some good things within the Commission’s overall proposal, particularly its desire to look at how we might improve communications to members and how we might improve scheme governance. Those aspects are ones that it is well worth the Commission looking at in some further detail, but the Commission has to be very careful what it wishes for if it wants to continue down this path of looking at high solvency rules for pensions.

Chair: We will come onto some questions on that later.

Q7 Brandon Lewis: Where within the EC do you think the pressure is coming from to have this increase in capital requirements? Is there a particular agenda?

Neil Carberry: It has long been a cherished goal of parts of the DG Internal Market within the Commission, based on an argument of completion of the single market, that in some way these schemes are in competition with schemes provided by insurance companies. I know a lot of companies that sponsor defined benefit schemes in the United Kingdom and the one thing that is uniformly true of them is that they take a lot more work and they are a lot more expensive than running an insurance scheme. It is not something that you set up because of some market advantage.

There is also a risk that, because the Solvency II Directive itself is still in the machine in Brussels in terms of its application, some of the push in this area is related to political tradeoffs with things that are happening in the Solvency II Directive. From a company point of view, I can only emphasise that across the whole of Europe-and I was in Paris, in particular, recently meeting some French companies in a similar position-all of our sister organisations see this the same way and are deeply concerned by the application of Solvency II to pension schemes.

Joanne Segars: I certainly agree with that. It seems quite clear to us that the push is from Internal Market, and that is partly also being driven by a particular issue around competition amongst, as we understand it, the French insurance industry and the French occupational pensions industry. As Maggie has just said, there are some member states-very few member states-where there is competition, but that seems to us to be a domestic issue within the French pensions sector. The Internal Market Directorate has taken this as an issue to help complete the internal market and free movement. That is its locus, if you like, getting into this debate. However, my members say to me, "Goodness me, it is difficult enough running a pension scheme in the UK; the last thing I am going to do is suddenly wake up one morning and think, ‘I know, what I really want to do is set up shop in France and run pension schemes for French workers’, no matter how much I might hold those French workers in high esteem".

We have seen some crossborder pension schemes established; the numbers have indeed increased in recent years, from about 78 to 84 in the past year, but most of those schemes exist between the UK and the Republic of Ireland. We can understand the reasons for that: language and the similarity of pensions and tax regimes. It is not any arbitrage around solvency rules that is preventing those crossborder schemes from being set up. It is a rather fictitious argument that the Commission have developed as a way of finding their way into this particular argument.

Nicola Smith: Just to add to that, wherever the pressure is coming from it certainly is not coming from employees. From our perspective, the TUC has had no representation at all that would suggest to us there is any employee demand for more crossborder pension provision. Certainly the ETUC, our sister organisation that co-ordinates affiliated unions across the European Union, has not had representations to that effect, and is in agreement with us about the damaging impact the application of this Directive could have on occupational pension provisions for workers across Europe.

Matti Leppälä: I agree with this analysis, and maybe it is important that you note that the legal basis for the present Directive is from the internal market rules. That of course gives a role for DG Internal Market. There is also, on a political level, the commitment of the G20 countries, because of the financial crisis, to have the same types of rules and regulations on supervision and prudential rules on all the institutions that are important in the financial markets. There is basically the same type of framework for banks and insurance companies; the idea now is to extend it to pension funds. That is more a political statement than anything else.

Q8 Brandon Lewis: Ms Smith, you mentioned in answer to the question a few minutes ago the impact this could have on job creation. I was going to ask what you think the impact would be. Could you expand on that a little bit? In what way do you think it would potentially affect job creation?

Nicola Smith: The point I was trying to make was that if pension funds are forced to move their investments from equities into safer bonds and gilts that could have the impact of reducing investment in economies in the UK and across other parts of Europe, which could slow growth and, in consequence, reduce the number of jobs created across the economy. Business investment and investment levels in the UK economy are extremely low at the moment. We need to see a significant boost in investment to get the recovery growing. The OBR’s3 forecasts have investment driving the recovery as we leave this recession in a way that has not been the case in previous recessions-or has not been the case to such a significant extent. It feels that, at a time when we need more investment getting into the UK economy than has been the case for quite some time, reducing the amount of investment that pension funds could possibly provide to help British business grow and create jobs in the future would be particularly perverse at this time.

Q9 Brandon Lewis: You, along with the NAPF and the CBI, have warned of, a "catastrophic impact on the stability of European financial markets" if there is this switch in asset allocations. Is that the other side of the same coin you are talking about, that that is the kind of impact and why that problem could occur if people keep switching that kind of investment?

Nicola Smith: Sorry?

Q10 Brandon Lewis: The CBI, NAPF and the TUC, as I understand it, warned the Commission that a major switch in the asset allocation that is likely to arise from the imposition of the Solvency II regime could have "an immediate catastrophic impact on the stability of European financial markets." I just want to ask you to flesh that out. It seems to me that you are talking about the job creation; the reason that that switch would potentially affect job creation is the same issue that would create that instability. Is that what you are arguing?

Joanne Segars: Yes, absolutely; it is the same issue, switching out of equities into gilts.

Q11 Brandon Lewis: It is that impact?

Joanne Segars: It is that impact that could be hugely destabilising.

Nicola Smith: Creating instability, as well as reducing investment into the rest of the economy.

Q12 Brandon Lewis: Some people in the markets would argue that that kind of instability is useful for the market, but it is not useful.

Witnesses: No.

Brandon Lewis: Okay.

Q13 Sheila Gilmore: Forgive my ignorance in asking this question, but the Government has indicated that it would like pension funds to invest in some of the longer-term capital infrastructure projects. Would any of these proposals have any impact on that?

Joanne Segars: One might argue that infrastructure is a proxy for investment in low-risk, return-seeking, inflation-linked assets like gilts. It is potentially about liability matching; that is one of the attractions that my members see in the proposals around infrastructure. However, the way in which we see that investment in infrastructure growing is organically and relatively incrementally. What we would see, as Nicola has explained, is a significant shift from equity to bond investments. Infrastructure will be there as part of the pension fund investment mix, but we would see a huge shift out of those investment-in-the-real-economy-type assets into fixed interest assets like gilts, where there are frankly simply not enough of them to go around at the moment.

Q14 Chair: Presumably it will depend on what sort of asset is issued for the infrastructure as to whether they are attractive. Mr Leppälä.

Matti Leppälä: Because of this problem, in connection to the public hearing on 1 March on the review of the IORP Directive we issued a joint press statement of eight organisations-the European-level social partners of both the employer and the employee organisations, the pension fund organisations, as well as the European pension capital and asset management and fund industry-that jointly took up this question of what would be the effects on asset allocation and thus on investing into riskier assets such as private equity or venture capital, which are very important for growth and employment in Europe. Of the private equity investments about a third are made by pension funds. If they are not able to invest in riskier assets, it will be detrimental for all of these participants in this joint press release. That has never been seen before at a European level. This is really a serious issue, not just for pension funds but for all those concerned.

Q15 Stephen Lloyd: I have been listening very closely, and I would like to make two real points before I ask some key questions. It strikes me that essentially the EU has a majority of states providing pensions in one way and broadly we are providing pensions in another way, and we seem to have the Commission trying to put the proverbial square peg in a round hole. We all have views of why they are doing that, but in a nutshell, would that be a fair summary, that the bulk of the EU pensions are provided in a different way from ours, and essentially what they are saying is "Right, you need to do this because, although it is inconvenient to the UK, well, tough"? Is that oversimplification?

Joanne Segars: There are essentially four member states that are particularly adversely affected by these rules, and four member states where DB is still quite significant: ourselves, Ireland, the Netherlands and Germany. The UK is particularly adversely affected because we do not have any flexibility around our rules when it comes to providing indexation, for example, or spouse’s benefits, some of the conditional benefits, where-I think we have already referred to the fact-the Dutch, for example, have some flexibility. Therefore, the UK is particularly adversely affected, but as others have suggested, one of the issues we have with this Directive is that it is a one-size-fits-all Directive but workplace pension provision across the EU varies very, very significantly, in a way that insurance does not necessarily. Therefore, trying to create that one-size-fits-all approach, even through the holistic balance sheet that purports to take account of national rules and differences, really does not work. I think your point is a correct one.

Q16 Stephen Lloyd: On that basis, because broadly most of you sitting there probably agree with what Joanne said, and a number of you, certainly the CBI, yourselves and the TUC, to quote my colleague, Brandon, have come out with the line that it would have an "immediate catastrophic impact on the stability of the European financial markets", I cannot think how one could be stronger or use stronger language than that even if they tried. "Immediate", that means tomorrow; "catastrophic", that means not good news; "impact on the stability of the European financial markets". Why do you not think that pretty clear message is still not getting through, or do you think it is beginning to get through? Let us take the CBI.

Neil Carberry: I think it is beginning to get through; there are people in Brussels who understand the argument we are making. We have certainly seen more action from the Government in the last six to nine months that has been helpful in making the argument. For us, there is a question about people understanding the scale of the assets involved, which are extremely large in terms of number and how widely spread across European equity markets they are. Joanne has mentioned the trend in UK equity investment: more and more equity investment from UK pension funds is going to other markets in Europe and around the world. The same is true of pension fund investment from other funded countries. To be honest, the lack of focus at the political level, outside the Commission in Brussels, has been because a lot of governments do not see this as a big dossier for them at the moment, because they are not directly affected. We should expect that to be the case, because it has of course not come to the Council of Ministers yet; the proposal is still being worked up.

The issue for us is that when it does come to the Council of Ministers, in whatever form, a number of governments there will have less on the table for their own country, but we and the Government need to make the case that this is a European issue, not a UK-specific or a Dutch-specific issue.

Q17 Stephen Lloyd: Mr Leppälä, do you have anything to add to that?

Matti Leppälä: It is very true what was said. Many things have to do with the fact that the landscape is so diverse and there is this notion of having docking on pillars-first pillar, public pensions; second pillar, occupational schemes; and third, private savings-but in reality it is so mixed. There are many schemes and systems that are between these different pillars. There is no legal structure that has these pillars. In effect, it is shown in the scope of the IORP Directive that many of the countries that have workplace or work-based pension schemes are outside the scope of this Directive, and thus at the moment they are not concerned. Where they are being included within the Directive they will be very concerned, but as this process stands today there will most likely not be a proposal that will change the scope. Thus, very few countries are faced with immediate problems, but if one looks further in the development of the internal market, if that is the purpose of this exercise, then of course it will not be sufficient from the Commission’s point of view that so many countries are outside the scope for various technical reasons, which really do not make much sense if one looks at the issue as such. In my mind, more countries should be more aware of this, and should take more direct action in this process.

Q18 Stephen Lloyd: On that basis-because it follows on-particularly for Joanne, Nicola and back to Neil, if that is alright, how reassured were you by Commissioner Barnier’s statement at the public hearing on 1 March? Did you think he has got it?

Joanne Segars: I would not say I was 100% reassured?

Q19 Stephen Lloyd: What percentage?

Joanne Segars: 30%?

Q20 Stephen Lloyd: As low as that?

Joanne Segars: I don’t know. We have heard Commissioner Barnier say before there will be no copy and paste of Solvency II into pensions, and we will take account of national specificities. However, when we finally see the proposal that EIOPA4 has proposed to the Commission and we hear rhetoric that the starting point for the revision of this Directive is Solvency II-and in fact it looks pretty much like Solvency II-it is quite difficult to be 100% reassured; maybe 30% is a bit too low. It is difficult to be completely reassured. However, I do very strongly agree with Neil’s point that the message is starting to get home. The force of opposition to the proposals at the public hearing on 1 March was extremely strong, coming from all parts of the social partnership, social partners and from the industry, and, as Matti has said, within the European-level representative groups in the financial services sector, there has been very, very strong opposition to the proposals.

Q21 Stephen Lloyd: Have you guys received a response to your joint letter? I know that you wrote a joint letter, again with the CBI and the TUC, in February setting out your concerns. Has the Commission responded formally yet, or has it just given a holding letter?

Joanne Segars: We have a response.

Q22 Stephen Lloyd: And is that still hovering around the 30%, or is it moving up a bit?

Neil Carberry: I remain to be convinced that either the speech or the response is sufficient for me to be able to turn round to our members and say, "Guys, you do not need to worry about this". As always, these things are subject to complex negotiation, and it is too early to judge whether we have made real and lasting process, or whether we have kicked the can down the road a little bit on one or two of these issues. Certainly in the previous public hearing before 1 March-which was in 2009, I think-had a similar tone to it: people from all over Europe making very clear to the Commission where pension funds, companies and employees stood. That only brought about a pause in the process of driving towards this goal. We need to wait and see what comes forth after the summer.

Q23 Stephen Lloyd: Sorry to drive you, because I have a couple of other very important questions and I have to go in 10 minutes. Is that broadly where you are as well, Nicola, in common your colleagues?

Nicola Smith: We are in a similar position. We have not received any messages that would give us a significant sense that significant change in the way this proposal is being taken forward is currently underway. We have received a response to the letter, and it reiterated some of the points that have been made publically about the lack of intention to propose a cut-and-paste approach and restatement of the fact that EIOPA has undertaken technical advice and will be conducting a quantitative impact assessment, which we await the outcome of, but as yet there is nothing that we have heard that gives us reassurance that the sort of changes necessary have taken place.

Q24 Stephen Lloyd: That is what I wanted to hear, a definite view. The next question is important: does the protection for pension scheme members that the UK system already provides not obviate the need for increased capital requirements on pension providers? I am assuming that is one of your main arguments when you are talking to Barnier.

Nicola Smith: Yes, it is.

Joanne Segars: Yes, and Maggie outlined what they were. We would all agree we are very highly regulated, and we have the new measures in place like the Pension Protection Fund (PPF), an active Pensions Regulator (TPR) and a big focus on employer covenant. They are there to protect scheme members.

Q25 Stephen Lloyd: Maggie, would you have anything to add to that? I know you are from the insurance side.

Maggie Craig: It is interesting that, coming from the insurance side, we are saying that. The insurance industry is working through Solvency II. That is quite hard work. We are getting through Solvency II, but we are also saying the Solvency II would be inappropriate for pension schemes. If we thought it was appropriate we would say so, and we recognise that pension schemes and insurers are not the same in the UK and that there are safeguards in place. We would absolutely be supportive on that.

Q26 Stephen Lloyd: That view from the ABI-which is a very significant representative of one of the largest insurance groupings, for want of a better word, across the whole of Europe-I would have thought your saying, or your body saying that, must carry some weight to your colleagues’ argument that it really is a different situation they are dealing with?

Maggie Craig: We would certainly hope so. We have been consistent ever since this issue was raised. You hear people saying, "Same risk, same capital"; that is the argument for applying Solvency II, if you like, to pensions, but the point is it is not the same risk, because you have the employer covenant, you have minimum funding standards, you have TPR, you have the Pension Protection Fund. The idea is "same risk, same capital", but it is not the same risk; therefore you do not need the same capital. We have taken that line all along, along with others here.

Neil Carberry: There is the question of the holistic balance sheet that is pushing around in the debate at the moment, which is meant to try and take this into account, but at the moment essentially, from the point of view of an interested observer, the holistic balance sheet amounts to a couple of slides with the PPF and the covenant and the scheme assets on one side and a heck of a lot of money in the liabilities column on the other, and no clarity about structure or design at all. If that is the offer at the moment which is meant to reassure us, it certainly has not done so.

Q27 Stephen Lloyd: You would not call it a realistic benchmarking tool?

Neil Carberry: It is not clear what the holistic balance sheet is in operation, so it is almost impossible to judge.

Maggie Craig: It is very difficult to assess how the holistic balance sheet would work and whether it would be effective because there is not enough detail on which to assess it. If-and there are a lot of ifs here-we do go down that route it would be very important that we get the chance to get the detail of the holistic balance sheet-it should not be left to level-2 level-so that we can have a sensible conversation about it if necessary.

Joanne Segars: That is a very, very good point: what we have not seen is any kind of quantitative impact study. If you like, we are being asked to say that we will agree to something without really knowing how that will work in operation and how much it will cost. We are being invited, if you like, to sign up to a blank cheque. That is something our organisations simply cannot do.

Q28 Chair: Thank you very much for that. There seems to be a consensus that Solvency II and UK occupational pensions have a slight conflict. Maybe if we could move on to some questions about governance and other aspects of the review and the role of EIOPA.

Q29 Sheila Gilmore: Commissioner Barnier has said that a real single market for occupational pensions "means lower costs for employers … more choice and security for workers". Is a single market in pensions desirable from a UK viewpoint, and would it achieve those objectives, those ones about choice and security, for example?

Neil Carberry: We come back to the point that Matti and others have already mentioned, which is that the difference of systems across the European Union makes a multicountry scheme offer quite difficult, mostly because with the second and third pillar, to borrow the European terminology of occupational and private schemes, those designs are almost entirely contingent on the design of the first pillar-the state pension-in each country. For instance, in the UK we have, at the moment, a contracting-out of the second state pension into defined benefit schemes, which is a product of the development of the UK state pension over many decades. That does make comparability very difficult, and it makes the costs of operating defined benefit schemes over multiple jurisdictions quite high.

Joanne has already mentioned that the vast majority of these schemes that exist in Europe at the moment are joint UK/Ireland schemes because of the similarities of the regimes. It may be, for some people, quite attractive to be able to have the same pension scheme in different member states. If you work for a large company, you move around, the pension scheme stays in the same place. The costs of that are exceptionally high, and our view is that, given the issue with different designs of pension schemes, it is preferable to focus on the money in the country where you accrued it-say you have moved from the Netherlands to the UK-being safe and secure, you know where it is and you are communicated to about it, than saying to people, "Yes, we are going to enable you to have the same scheme in the two countries; because of this small group of highly mobile workers we are going to impose costs on the whole system".

Joanne Segars: I very much agree with that. I do not detect any demand from my members to establish crossborder schemes. Regarding the members of those schemes, as Nicola has already commented, there is often not real demand from employees. Those barriers are not to do with the regulation or any sort of regulatory arbitrage as the Commission has suggested in the past. They are cultural; it is to do with tax legislation, language, and a whole series of other issues, which are much more important. Neil is absolutely right that what members want to know is that the pension is safe and secure in the member state where they have accrued the benefit.

Q30 Sheila Gilmore: So you do not see there being a need for a level playing field for competition, for example, because that would assume that there are a lot of crossborder pension schemes being developed. So it is not an issue for competition policy?

Joanne Segars: No.

Maggie Craig: No. If I can answer that, if you looked at it from a purely commercial perspective, I do not have ABI members saying to me, "Go and get the Commission to change this or change that because we are desperate to sell pensions crossborder"; that just does not happen. It is a combination of a couple of things. From the personal level, for employees, let’s face it: some people move crossborder, but many, many people do not. They tend to want their pension in their own country, and also pension schemes of all types are also bound up with social law, tax legislation, labour law-all these things. It is just not a viable commercial proposition. I have never had any sense from my members that they want us to work on changing that. I am not getting that.

Q31 Sheila Gilmore: So it is not competition. Are there any other crossborder measures that you are seeking to address?

Nicola Smith: I would say that there is not really any need for this type of provision to be introduced. As Joanne said earlier, there are very few crossborder occupational schemes in operation at the moment. From my perspective, that is a result of lack of demand for such schemes to be extended, rather than problems in the market that are preventing their creation. Just to reemphasise what others have said, from an employee’s perspective it is far more desirable to have a secure and stable defined benefit pension. If the cost of the option for a small minority of employees having crossborder provision is that large numbers of employees have no defined benefit provision in the UK anymore, and that pension schemes and occupational schemes are able to offer poorer returns and have increased costs placed on employees to contribute to those schemes, it is clear that it is in the employees’ interest for us to retain the current arrangements rather than move to a crossborder arrangement that risks destabilising employee pensions far more significantly.

Q32 Glenda Jackson: Is this not really, though, about the disparity between big earners and low earners? If you are a big earner for an international company, you go all around the world and there is no problem with people providing you with pensions and so on and so forth. We are looking at a situation in this country where autoenrolment is going to come in, and millions of people who no pension company has bothered to try to find a scheme for are going to have to. Are we not being perhaps a little too sanguine about this idea that there is not going to be crossborder movement of employees in the future? Certainly, it seems at the moment the people who have no problem in crossing borders in Europe are low-paid workers, who in the main do not expect to have a pension anyway. As far as the industry is concerned, is the element not so much that it is going to be difficult, but that it is a market you have not looked at before?

Joanne Segars: My members are not in a position of selling pensions; they are employers who provide pensions. You touch on a very important point, which is that there are 60 million European workers who have no access to a workplace pension at all. One of the things that we at the NAPF have made very clear in our submissions is that that should be one of the areas that the Commission focuses on. The White Paper that is being produced by DG Employment will hopefully touch on some of those issues, and it does talk about coverage and in particular about some of the gender issues that we think are very important. However, the big problem, it seems to us, is not necessarily-to go back to the discussion we were having on solvency-around the solvency issues; it is around the fact that 60 million European citizens have no pension rights that come with their job whatsoever. That should be an area of focus for the Commission.

Q33 Glenda Jackson: That is not part of what is being proposed at the moment?

Joanne Segars: It is not part of this Directive; it might be picked up in the White Paper.

Q34 Glenda Jackson: Will the proposed changes benefit the UK employers and pension scheme members? Is there a benefit there somewhere? You have not led us to believe that there will be any.

Nicola Smith: No.

Chair: I do not think we have ever seen so much agreement.

Neil Carberry: The UK regulatory system-

Andrew Bingham: The hesitation says it all.

Neil Carberry: I am trying to think of something. There are some things in the White Paper in particular where it is probably sensible for the Commission to be fostering European discussion: longer working lives, steps by governments on state pension reform, on governance and reporting data on the scheme back to members. Those are all very sensible things, but they pale in comparison to the impact of the rest of the thought process that the Commission has brought forward. At the moment it is quite hard to see any blue sky among the overcast clouds overhead, but there are one or two things which it would be reasonable to discuss intergovernmentally, yes.

Q35 Glenda Jackson: Do you think that UK companies need additional provisions in order to operate effectively?

Neil Carberry: My members are very much of the opinion that the regulatory framework has been added to and added to and added to in this area, and that for the preservation of the 2 million active DB members in the UK private sector now it would be best to leave well alone.

Q36 Glenda Jackson: The Portability Directive: is it either realistic or desirable to try to revive it? Is there any evidence that the current arrangements are a barrier?

Joanne Segars: This Directive has been talked about for the last 20-odd years, perhaps as long as I have been working in pensions. It has had many, many revivals, let us say. Clearly-and we have clearly focused in the UK-it is important that workers can move their pension around when they change jobs. I was just looking at how we can ensure that people in the UK get maximum value for money when they change pensions-the big pot project that Steve Webb is looking at, the consultation for which closed on Friday. We certainly see it as important that people can change their pensions when they change jobs; we have a rather more flexible approach to that than a number of other member states. Perhaps it is something that is worth looking at again,

Q37 Glenda Jackson: To go back to the point you made earlier about 60 million people who do not have anything in Europe at the moment, if we are going to see-as I believe we probably will-much greater movement of labour across the European Union, certainly as the expansion goes on, would this be useful in, if not delivering, at least encouraging people to look more positively at the idea of having a pension scheme, if they could carry it with them?

Joanne Segars: You are right. One of the things we see in research is that one of the things that puts people off is the idea that if they change jobs, they lose their pension. Of course we have gone a long way-perhaps not far enough-towards tackling that problem here in the UK, but it is something that should make pension provision more attractive. The Directive is looking at transfers within member states, rather than across, as I recall.

Q38 Glenda Jackson: Would there be any inherent necessary change in the structure of the idea of portability.

Joanne Segars: We would have to see how that legislation works. My understanding is probably not for the UK.

Q39 Glenda Jackson: I am thinking in size or benefit, if there would be some kind of, "Yes, okay, you can take yours but you cannot, because of this".

Maggie Craig: There are two levels to this. If the idea is to look at better pension portability within member states, then that is one thing and the UK has, as Joanne said, gone a long way down that road. If the idea, as I think you are talking about, is potentially extending that to pension portability across member states, then absolutely, that would be a great idea. Unfortunately, the stumbling blocks that you come up against there sometimes go back to the fact that pensions are rooted in national state tax law. If you are going to move it from France to Spain, Spain to Germany or whatever you can come across those barriers. It has been precisely those sorts of problems on which a panEuropean Portability Directive has foundered before. As you say, with people moving more often, if they could transfer, then maybe it would not matter that there was not a panEuropean pension, because they could effectively take it with them, but the tax law would prove a problem, as it has in the past.

Q40 Glenda Jackson: I know it does not work perfectly, but at the moment the benefits systems agreed between the member states seem to function fairly adequately.

Maggie Craig: I may be wrong here, but certainly the last time I looked at it-and as Joanne says, it has come up several times in the last 20 years-it was less the benefit system issue than the tax system. You get tax relief in Country A, and then you move to Country B, which does not give tax relief, and that tends to be a problem.

Q41 Glenda Jackson: That would be part and parcel of that whole deal, would it not?

Maggie Craig: It depends at what level you are looking at.

Matti Leppälä: I agree with what has been said. This is an important issue: the free movement of labour and other people as well. It is important that pensions play a part in this, not maybe the vital part, but it is an important part, especially if you lose your benefits if you move from one country after having worked there. You have a long vesting period in one country and then you will lose those benefits. That is definitely a problem. It seems at the moment that these major problems that we were faced with some years ago when this Directive was debated last time have not changed, so it is very difficult to see that there would be any big changes in this debate. There are some attempts to have voluntary agreements between different countries and different systems. That might work well. The fact that many countries are moving from DB systems to defined contribution systems where you do not have the same types of problems with portability may change this. That is, of course, an issue, but I am sure that the Commission will table a new proposal on the Portability Directive and it will be debated. It is a topical issue.

Q42 Glenda Jackson: Is the fact that all European countries-well, almost-are having to look at the prospect that we are all going to have to work longer part of the thinking on this, or has it not come up yet?

Nicola Smith: I am not certain as to the extent to which discussion about the Portability Directive has been informed by concerns about rising longevity and demographic change. It is clear that, in the White Paper, that is driving a lot of the Commission’s thinking. The proposal in the White Paper, specifically that member states should be linking state pension age to rising life expectancy, is one that causes us at the TUC quite some concern. While we welcome the Commission’s focus on the need to improve working conditions-to enable people to choose to extend their working lives, to improve access to support for those with caring responsibilities and to improve the ability of those with health problems to continue to work should they chose to do so-our worry, as has been stated many times, is that with such large discrepancies in life expectancy between those who have been undertaking lower or higher income jobs throughout their lives, it is likely that any proposal to link state pension ages to the average of life expectancy across a country will disproportionately deny a large number of those from poorer backgrounds a much larger proportion of their state pension than would be the case for those from higher income backgrounds who are likely, in any case, to have been working for a lower proportion of their adult life.

Q43 Glenda Jackson: I was thinking essentially of that workforce who moved around Europe when there was the great building boom. The hugely destructive industries-physically destructive industries-have, in a sense, gone from Europe, haven’t they, but this portability could be linked to people simply not being able to work, even though they are expected to work, because the work they have done has made them physically incapable. It was just something that I was thinking. I go back to the point that there does seem to me to be a discrepancy here between the ease of benefiting for those who are on high level incomes-if there are going to be benefits in any of this-and those who are on low incomes or not even in a pension scheme at all.

Nicola Smith: On that point, I understand from colleagues at the ETUC that one concern we had with the Portability Directive when it was last discussed was the extent to which it had been watered down. For example, if I am right, when it was last discussed, only those aged under 25 would not benefit from the Directive. We and the ETUC had been calling on the proposal to be revised so that membership age could be 21 and under to include a larger number of workers within the scope of the Directive. We would have to see the detail of what the new Directive looked like, but there might be concerns from social partners about exemptions or how tightly the criteria drawn for those to whom the Directive would apply.

Neil Carberry: For completeness, it is worth noting one of the big stumbling blocks for this Directive is political opposition from states that have very long vesting periods for their occupational pension, i.e. that before your pension stays as a pension when you leave the company you have to clock up a large number of years in the company. That clearly means there are a lot of votes at Council from countries in that position who are concerned about the principle of portability per se, even before we get into the workings of the Directive.

Q44 Glenda Jackson: The Commission has stated that one of the objectives for the IORP reform is to ensure transparency and good governance of DC schemes. Are these proposals likely to help to achieve this? Are we not already a good example from which-I hesitate to say this-other member states might benefit and could learn? Is there stuff we can learn from the other member states on this issue, such as transparency?

Joanne Segars: We should never think we have the full answer on anything to do with pensions. Of course there is more we can learn from other EU member states and other countries more generally. Certainly one of the issues we have been looking at at the NAPF, together with colleagues represented here, is the issue around transparency of costs and charges, on DC pensions, and indeed the last Select Committee evidence session that I was involved in looked at this in quite some detail, and of course your own Report published last week commented on this in, I have to say, a very helpful way. It is an issue we are looking at; we are working with colleagues at the ABI, the CBI and the TUC to look at how we might develop a code of practice for employers that helps employers understand more clearly, and in a way that is easier to compare product with product or pension with pension, some of the costs and charges levied on schemes. We hope to extend that to a code of practice for individuals. Because we have a quite sophisticated DC market in the UK, we have done a lot; there is clearly more that we can do and we are already committed to doing as an industry in the UK, and which we would hope our colleagues across Europe could perhaps learn from, and which the Commission itself might find constructive as it takes forward some of these proposals.

Maggie Craig: It is something we are doing a lot of work on, and we are very glad to be working with colleagues on this. We also need to be slightly careful, again, that requirements in the Solvency II that work for governance in an insured context do not necessarily get transferred over to a defined benefit pension scheme context. If I may give just one example-because I am not an Solvency II expert-within Solvency II there are very strict fit and proper person requirements. That is fine and that is applicable there. However, what would happen if, for example, those fit and proper person requirements were transferred across to defined benefit schemes? Would defined benefit schemes still be able to get people willing to come forward to be member nominated trustees, which have been a very important part of the defined benefit landscape for a long time? I am not suggesting that that is the only reason; I am simply saying that absolutely I support what Joanne says about governance and transparency. We have done a lot in the UK; we are continuing to do more. If there are things we can learn from Solvency II, absolutely we should, but can we just make sure that we learn the appropriate things.

Q45 Glenda Jackson: Is there not a paradox here from the evidence we have had in the past? For instance, the code of good practice: does that impact against the benefits that will come from competition, for instance? We did have evidence-I cannot remember the gentleman’s name, I think he was from Denmark, where they had a very different type of pension scheme. We have seen differences in New Zealand, for instance. Is there a danger that, for the best of all possible reasons, the uniformity of good practice-which, let’s face it, we need-could also possibly impact on good competition?

Joanne Segars: I personally think it would enhance competition. If consumers-whether those consumers are employers setting up a scheme for their employees or the end consumer, the end member-can see more clearly what the charges are on those schemes and what they are being charged for, that should help to drive competition and clearer practice. That has to be a good thing, whether it is in the UK or elsewhere in Europe.

Q46 Glenda Jackson: It is a recurring theme. We have touched on my next question, which essentially was the appropriateness of a code of good practice being developed by the EC, a kind of certification scheme. What would you say about that, the kind of imposition on that level, as opposed to something that I presume industry itself would come to agree with, or create, even?

Joanne Segars: From our perspective at the NAPF, it is an issue we think is worth investigating, but because of some of the issues that Maggie and others have touched on, there are such huge differences in the way that pensions are provided across the EU, any such code of practice would have to be really quite high-level and quite principles-based. That might be something around very high-level communication, for example. Anything that endeavoured to be very prescriptive could, as Maggie has said, run into trouble quite quickly in terms of its applicability across EU member states, because pension systems are so very, very different.

Q47 Glenda Jackson: Would that then mean in a sense that the individual nation states would be the guardian of this code of practice, with a kind of link in to the EC where basic principles had been agreed, but where the actual sheriff, if you like, is the member state?

Joanne Segars: That would be the only possible way it could work.

Maggie Craig: That does sound like a model, but I would agree with Joanne. Because of the diversity of pension schemes across Europe-and different member states doing different things and developing different things at different paces-it would need to be high-level and not try to get too much into the detail.

The other thing would be that the EU would need to take a little bit of a step back and say to itself, "What problem are we trying to solve here? What is the code of practice trying to do?" Codes of practice, particularly if they are high-level, can get a little bit lost and rarefied. Is the code of practice to encourage employers to provide pension schemes while we are going to have autoenrolment? Is it to promote good practice? You need to establish the key things it is trying to achieve and then keep it high level and then let member states fill in the blanks, as it were, in ways that were appropriate for their own circumstances.

Q48 Glenda Jackson: We do not want more misselling, do we? What do you see EIOPA’s role as being in taking forward and implementing these reforms, if indeed they come about?

Joanne Segars: EIOPA has only been in existence for a relatively short time, but it has already established that it is and will become a very, very important player in developing these proposals. It has proved itself to be very technically competent. It is certainly starting up in Frankfurt very quickly. It has proved itself, like I say, to be very technically competent. However, it needs to focus on some of the wide political issues and political contexts in which the issues it has been asked to resolve are taking place, because the answers are not simply technocratic, as we touched upon earlier.

Q49 Glenda Jackson: Is there support for the way they are working at the moment, would you say?

Joanne Segars: I hope we have been supportive of the way in which EIOPA has been working, and I would like to think we have been responsible stakeholders.

Q50 Glenda Jackson: I am talking across Europe here; is there the kind of willingness to listen, to work together, and to take it forward, given that it is new?

Neil Carberry: The primary concern people had as it started its work, from the pensions side, was that here is an organisation where we suspect the "I" (for Insurance) will be very loud and powerful, and the "P" (for Pensions) will be considered secondhand by a lot of people who are not very knowledgeable about pensions. The process of the last year has shown that they have dealt with the pensions issue with some skill, which is welcome. There are remaining questions about independence and the wider political positioning; it was a surprise that they were so clear in their call for evidence; I paraphrase, but they effectively said, "And do not tell us you do not want this for this reason or that reason because we will not listen to you", more or less, which intimated that there was a direction of travel. That speaks to the point Joanne has made about wider political issues in consideration.

Having said that, once you get into the detail of pension consideration-which is what they are about-they seem to have done a very adequate job with a brief that says, "Consider how Solvency II would be applied if we chose to apply it". They did that. Perhaps political neutrality was the best we could hope for. They did make a statement that said, "You asked us ‘if you chose to apply it’, and we have taken that as it said on the tin".

Matti Leppälä: Just to add that you have to remember of course that the creation of EIOPA is part of the answer to the financial crisis. All of these new supervisory authorities were established because of the crisis or in connection with it. There is a sense of urgency and support from national supervisors. Of course the role of EIOPA is very different than its predecessor: it is much stronger and it can decide on binding rules. It has a much firmer grip on the national level of supervisors as well. It is interesting to see how strong it will be. I know that the Commission is concerned that the expertise will be in EIOPA; it will grow to be more powerful. There is not such a thing as just technical advice on these issues; it is always political advice as well. There has to be a good balance between EIOPA, then the Commission, and then the member states and other stakeholders in this. It is of course very important that EIOPA is an expert when it has this strong role in pensions and insurance.

Q51 Glenda Jackson: Those were my next two questions, essentially: did you feel that it had the necessary expertise and technical background for this, and how sensitive was it being with the individual member states, given that there obviously is this political energy in it?

Nicola Smith: We have not had any reasons to question the technical expertise of EIOPA. The only thing I really have to add is that, as far as ways of working, there has been a stakeholder group established, and we have a UK trade union representative on that group, Naomi Cooke from the GMB. That has provided us with an insight into the debates happening within EIOPA, and a means to ensure we have communication and access to the technical detail and the work that is going on. As far as the way it is operating, we do not have any particular criticisms to make. Our concerns are more with the wider political process in which its work has been situated.

Q52 Glenda Jackson: What kind of changes would you like to see in that area, then, if any?

Nicola Smith: I suppose it comes back to the basis on which we are here talking to you today: that the proposal has been put forward for the harmonisation of occupational pension schemes without the question initially being asked as to whether or not we need that harmonisation to take place. It comes back to the concern that we are already going down a particular policy route with no evidence as to the need for that policy to be implemented.

Q53 Glenda Jackson: It goes back to the point that was made earlier, doesn’t it: why do they want this? What does the Commission want, what are the outcomes? Is it to ensure that people have pensions that are going to maintain? What are the outcomes? That is about it from me.

Chair: We are now going to move on to a section about the EC White Paper proposals.

Q54 Andrew Bingham: I suspect I know the answer to a lot of these too, as we have already gone through a few bits. I am not going to bother with a couple of the questions. Do you think it is the role of the EC to strengthen pension provision, or do you think it should be delegated and left to the individual member states? You said there are a lot of differences around the different areas; as a consequence of that, do you think it should just be left to member states?

Neil Carberry: Primarily it is a member state competence, for the reason that, as we saw with the debate last week, the treatment of pensions is very significant in national political debates. The design of the pension system is very specific to each member state; no other European country is particularly interested in what the personal allowance for pensioners in the United Kingdom is, but it dominated the political debate here at the tail-end of last week. That means that, for the most part, occupational and private pensions should also be matters for the member state because they are so interlinked in design. There are some things where you might want to have a discussion at European level. We touched on them earlier: we all face the same demographic challenges; we all face the same issues in terms of plans for retirement. In European law, of course, age discrimination law governs how people are retired. There are bits and pieces that you can do at European level, but broadly it has to be a member state lead.

Matti Leppälä: For the reason that pensions are matters for the public finances-and especially for those countries that are within the European Monetary Union-of course it is a question for the European Union as well. It was an academic debate for Greece whether other members states are responsible for other countries’ disasters and liabilities, but anybody who has any sense of what is actually happening within the Monetary Union does not make this claim anymore. If the member states do not take care of the public finances, of which the pensions are the biggest component, it will be everybody’s problem. It is in the interest of the European Union to have stability in the public finances in any other parts of the financial market.

Of course another part is that if there are increasing problems in the public finances and more reliance on the second pillar, occupational pensions, then there is a European dimension in this as well, if this is as a result of European policies. Issues such as poverty in Europe are European questions, and they relate directly to the question of adequate pensions. Of course then, again, one has to respect the member states and their competencies, and the Union only has those competency skills in the basis treaties. For the most part, the details are then decided on at member state level. The Union has already done for more than 10 years these soft laws and policy projects; even though they seem very bureaucratic, there is a lot of sense in what they are trying to achieve. Those projects are done at European level as well.

Joanne Segars: I would certainly agree with Neil that these are predominantly issues that are a member competence. The Commission, as Matti has said, will have concerns about levels of pension poverty and levels of adequacy, but predominantly the method by which pensions are provided are a national competence, because they are so intrinsically linked with national taxation legislation and social and labour rules; they have to be a national competence.

Q55 Andrew Bingham: The Commission has said that by strengthening the second pillar it would reduce pressure on public finances and lead to greater economic efficiency. Are we not already doing that with autoenrolment and increasing the state pension age? Are we ahead of that already in the UK, do you think?

Joanne Segars: If you look at the detail of the White Paper and the 20 action points, if you like, that the Commission have set out at the end of the White Paper, the UK has achieved an awful lot and made an awful lot of progress against those 20 principles, such as increasing coverage through the introduction of autoenrolment. I know when we sit around the table at the European Federation for Retirement Provision, where the NAPF is a member, a number of member states say to us, "We are waiting to see how autoenrolment plays out in the UK to see whether our national governments might take that as a route in their member states". Whether it is extending working lives, as we have already talked about, or abolishing the default retirement age, these are all proposals there in the White Paper where the UK can say, hand on heart, "We have made a huge amount of progress against those 20 principles". To that extent, I would hope the UK could be an exemplar from which the rest of Europe might learn something.

Q56 Andrew Bingham: Are any other member states taking any action, or are they just sitting back and letting us steam ahead?

Joanne Segars: Certainly there are proposals in Ireland to look at, perhaps, the introduction of autoenrolment. Other member states are taking action to increase state pension ages, some much more controversially than ever appears to be the case in the UK. They are also looking at ways in which they can help extend working lives. I do not think we are alone in this, and certainly the introduction of autoenrolment does mean that we are perhaps ahead of the curve.

Nicola Smith: I wanted to add on the extended working lives, it feels to the TUC that there is far more that could be done in the UK to support older workers to choose to extend their working lives, whether that is through bringing forward proposals to extend the right to request flexible working to all workers across the labour market, or through moves forward to increase childcare provisions, so that more working mothers are able to work, and in turn older people and grandparents have less childcare responsibilities placed upon them and are more able to continue to work because they are not supporting their own families.

While there have been proposals, which the TUC is not in favour of, to link the state pension age to longevity and to increase the age at which the state pension can be claimed, we have welcomed proposals to end the default retirement age and we would welcome far more work looking at both how we can boost the choice of older workers to extend their working lives, and also how we can-yes, obviously over the immediate period, when we still have very high unemployment, but into the future as well-boost our employment rates so that they are comparable with some of our European competitors. For example, regarding female employment rates in the UK, research the TUC will shortly be publishing will show that if we could boost employment rates to those of some of our European competitors and Canada we could significantly reduce the dependency ratio that we are forecast to have in 2041. Also, if we could look at extending people’s working hours so that we have less very shorthours working and more people able to extend their hours up to 20, 25, towards full-time employment, that could also have a significant impact on the dependency ratio. That is not always discussed and we would like to see Government policy focus more on how that could be achieved than maybe is the case at the moment.

Q57 Andrew Bingham: The Government’s position is that-back onto the pensions issue-reliance on guidance and sharing best practice is a better way of taking this forward than legislation. Do you think that is a fair assumption, a fair assessment?

Joanne Segars: On general matters?

Andrew Bingham: On the whole thing about the pensions and second pillar etc. The Government’s view is that instead of legislating according to what the EU want, we are better sharing ideas across member states and cherrypicking good ideas.

Joanne Segars: There is an awful lot that we can learn there, and Neil said earlier on his members are sick and tired of more and more legislation being placed on pensions; that is something that certainly those people running occupational pension schemes would very strongly echo. We all look forward to the Government’s red tape challenge on pensions, as the spotlight turns on pensions and how some of the regulations there could perhaps be consigned to Room 101. If we can learn through codes of practice and by sharing best practice then we should. There is a huge amount we stand to learn from each other.

Matti Leppälä: I would like to point out that there is good experience of this. During the last 12 years, we have had the European pension policy in place, starting with the Lisbon Process. Even though it is frustrating at points, when we have assessed it afterwards, there has been great progress in many countries. The notion of this whole idea is that there has to be continuous reform as part of this. To have sustainable and adequate pensions you need to reform the systems, but you first have to gain truthful information and understanding of the real problems, and a review and looking at best practice is a very nice way of doing this, much better than legislating from Brussels. It leads then to nation states and the social partners, within various ways in different systems, to find the best various ways in different systems to find the best possible solutions for these problems.

It is important that Europe makes the member states face these problems. If one looks at one state it looks like you have your own problems, but if you have a wider look there is a European agenda.

Nicola Smith: I have a simple point: to recognise that of course, at a national level, regulation is what has provided us with the means to be moving towards the introduction of autoenrolment later this year. Good-quality regulation clearly has a very important role to play in improving access to pensions and to savings for very large numbers of workers, who would, without regulation, not have had that access to autoenrolment and will be benefiting from it later this year, albeit to a delayed timetable, which we are disappointed by.

Chair: I am conscious that we do not have much time left-I think Maggie you have to be away, don’t you? Can we deal with next steps and representing the UK’s views to the EC?

Q58 Sheila Gilmore: Do you have any comments about whether the timetable is realistic and what you think is likely to happen? For example, the suggestion that the draft of the revised IORP Directive will be available at the end of this year: is that realistic?

Joanne Segars: No.

Maggie Craig: I echo what Jo said. I have a couple of concerns. Again, to pull the comparison back to Solvency II, Solvency II has been something like 10 years in the making. I am not suggesting that that is necessarily a good thing, but if you try to juxtapose that with an IORP Directive-we have heard comments already today about things like the holistic balance sheet needing some detailed work, and if there is going to be impact assessments they need to be properly done. This is all very finely balanced stuff, and it has a huge impact on people. I would be very worried about an ambitious timetable-and I think this is an ambitious timetable-that means that we do not get the right data to work on, and the impact assessments are not properly handled. Pensions are notorious for the law of unintended consequences, so I do have concerns about the timetable

Neil Carberry: That is absolutely right. The impact assessment, of course, is supposed to be done between now and the autumn, which is an extremely hopeful assessment of the potential to do a proper impact assessment. Also, the plan for the QIS5 does not include everything that we would like to see included in the full impact assessment. My view would be that one of the critical things for us all to achieve, working with Government, is that when the impact assessment is published it has properly bottomed the issues that we have talked about today. That probably will take longer than now until September or October.

Q59 Sheila Gilmore: What about your own involvement-any of you-in the impact assessment? Do you feel you are going to get involved sufficiently to have your views represented in this?

Neil Carberry: Certainly, speaking for ourselves, one of the members of the EIOPA stakeholder board is very active in the CBI, and they, along with our pensions team, will be working to make sure that all the data that we can supply are fed into the impact assessment, and we will be working with our sister organisations in Business Europe to make sure that that case is made very strongly from every member state, including those who, as we have discussed today, have not yet got to the bottom of what this might mean for them.

Nicola Smith: We have certainly been working, through the ETUC and Business Europe, to call for the impact assessment to be as comprehensive as possible and to make sure that it assesses the cost effectiveness of providing occupational pensions, looks at the impact of the potential imposition of the Directive on retirement provision for employees and also looks at wider macroeconomic effects. We will certainly be considering the impact assessment when it is published to determine whether or not it meets those tests, and whether or not it is comprehensive enough against that benchmark that ETUC, Business Europe and indeed ourselves have been very clear to set out.

Joanne Segars: From our perspective that same is true. I very much agree with my colleagues’ assessment that the timetable that has been set is far too short for an issue that is this important, that affects so many millions of people and has potentially very important, as we discussed at the beginning, adverse macroeconomic consequences. We do need a proper impact assessment and we do need a proper QIS. I think we are up to QIS5 for insurance already. We have to make sure we get this right. It cannot be rushed. From a NAPF perspective we will certainly be making sure, through our European Federation and through the EIOPA stakeholder group and through the UK decisionmaking processes and decisionmaking bodies, that we will get involved in that to make sure that the views of those currently on the occupational pension schemes are fully taken account of.

Maggie Craig: We will be doing the same: we will engage directly and we will also engage through Insurance Europe. That will present us with some challenges, because Insurance Europe includes trade associations of other member states that have a very different view-going right back to the beginning-in terms of how Solvency II should or should not be applied.

Q60 Glenda Jackson: Along with that, do you think that the British Government are giving you proper support? Are they alert to your interests, not only as an industry, but as employers and providers? Are they actually singing from the same hymn sheet, as far as you are concerned? Is there unity between Departments of State, like the DWP and Treasury, on these kinds of issues? Are they with you on this?

Joanne Segars: Yes they are, and I think that has been one of the remarkable things. You said from the Chair that there is huge unanimity between us, and that is not always the experience in front of Select Committees, but again, there is huge unanimity between the stakeholders, Government and across Government Departments. That has been enormously helpful in terms of ensuring that the opposition to some of these proposals is felt in the right quarters and in helping to ensure that the UK position is really heard.

Q61 Glenda Jackson: So they are laying it out for the Commission are they? They are putting it on the table for it?

Joanne Segars: Yes.

Glenda Jackson: Very good.

Q62 Chair: Just to conclude, in terms of the UK’s position finding allies, where should the UK expect to find other member states that would share similar concerns?

Neil Carberry: There are probably two groups. There are the fellow defined benefit countries: roughly speaking the Netherlands, Germany, Ireland specifically, but also, to a certain extent, Belgium and some of the Scandinavians. Then there are the new member states, who do not have a particularly developed pensions system, having come out of an almost entirely first pillar system, and in those states governments are of course faced with a very great demographic challenge in thinking about, "How do we resolve this?" If the UK’s positioning is that sustainable pension schemes are the best sort of pension schemes, because you know they are going to be there in 30 or 40 years when you retire, then those governments would be well positioned to take the view that a position closer to where British Government is is better for them than a position closer to where the Commission is. Those are the two fronts, as it were, for us to go after in Council.

Q63 Chair: Do you think the UK Government is forging those alliances effectively?

Nicola Smith: Certainly it is our experience that officials are in contact with their counterparts in other countries across Europe where there may be alliances and common discussions to have. While I cannot speak for the Government and I do not know the content of those discussions, I am certainly aware that they have been formed and that contact has been made.

Q64 Chair: What about your counterpart representative bodies? Are they also active in this area?

Neil Carberry: Yes.

Maggie Craig: Yes.

Joanne Segars: We are talking to our colleagues in our equivalent federations in the Netherlands, in Ireland, in Germany and through our European federation through the ETUC as I know others are through ETUC and Business Europe.

Chair: I know when we were in Brussels the year before last, we met the European-level representative bodies and they were all very much saying the same thing. It is very nice to know that it is still going on and is still happening across Europe. Unless anyone has anything further to say, or if any of you have anything further you would like to comment on, thank you very much for your time. Again, as you say, great unanimity: we have never had quite such consensus, and it will certainly give us a great deal to work on in our inquiry. Thank you very much for your time and thank you for coming.


[1] Pension Protection Fund

[2] Quantitative Easing

[3] Office for Budget Responsibility

[4] European Insurance and Occupational Pensions Authority

[5] Quantitative Impact Surrey

Prepared 27th July 2012