UK on the Verge of 'DB Catastrophe'?

Richard Evans of the Telegraph reports, All final salary pension schemes will close under new EU rules:

Many businesses could also be pushed into insolvency by European pension proposal, risking significant job losses, three industry bodies have warned.

In a letter to José Manuel Barroso, president of the European Commission, ahead of EU directives due this week, the National Association of Pension Funds (NAPF), the Confederation of British Industry (CBI) and the Trades Union Congress (TUC) warned that the new rules would have a disastrous impact.

"By demanding dramatic increases in funding from employers, the commission's plans would – at best – force all remaining defined benefit schemes to close and – at worst – push many businesses into insolvency, leading to significant job losses," they wrote.

On Wednesday, the European Insurance and Occupational Pensions Authority (EIOPA), a pan-European watchdog, is due to send final recommendations on its EU pensions directive to the European Commission, aimed at addressing shortfalls in pensions schemes and improving risk management.

EIOPA is proposing to adapt Solvency II capital rules, originally aimed at the insurance industry, which could force pensions funds to hold large cash buffers in proportion to their liabilities, to guard against future risks.

Solvency II has been more than 10 years in the making, and its original 2012 introduction date has already been postponed once, drawing criticism from the insurance industry.

The NAPF, which represents 1,200 pension schemes in the UK, with 15 million members and assets of around £800 billion, has already warned that the new rules could cost the industry £300 billion.

Joanne Segars, chief executive of the NAPF, said: “These plans would cause massive damage to UK pensions and undermine economic growth across Europe. Instead of making pensions more secure, they would have the opposite effect.

“Solvency II type rules would put extra pressure on companies struggling for survival, and also force them to divert money away from investment and new jobs. Faced with extra funding demands, many businesses will simply shut their final salary pension down."

She added: “The European Commission will receive a crucial submission this week from its own advisers on how to take the project forward. We believe a comprehensive impact assessment is needed before any decision to go ahead.

“The UK already has a strong system to protect pensions. During these tough economic times, Europe should focus on fostering growth and job creation instead.”

Many final salary schemes have already closed, or shut their doors to new members, as a result of increasing longevity, poor returns and changes in tax treatment.

Michael Trudeau of the FT quoted the NAPF reporting, Pension reform will trigger DB ‘catastrophe’:

Proposed changes to European pension regulation would have a devastating effect on employers and force the closure of all remaining defined benefit pension schemes, UK trade bodies have argued.

In a joint letter to José Manuel Barroso, president of the European Commission, the National Association of Pension Funds, the Confederation of British Industry, and the Trades Union Congress argue that proposed changes to EU pensions regulation could throw the region into further economic disarray.

The letter warns that increased costs to employers as a result of the proposals would “at best force all remaining defined benefit schemes to close, and at worst push many businesses into insolvency.”

The associations claim that changes proposed under the Institutions for Occupational Retirement Provision directive would result in pension investments fleeing return-seeking classes such as equities in favour of relatively risk-free high-quality bonds and gilts.

Co-signed by Joanne Segars, chief executive for Napf, Brendan Barber, general secretary for TUC, and Katja Hall, chief policy director for CBI, the letter says: “With European pension funds holding over €3,000bn (£2,511bn) in assets, a major switch in asset allocation would have an immediate catastrophic impact on the stability of European financial markets.”

“Given the overwhelming priority that must be given to increasing the economic competitiveness of the EU in the coming decades, it would be a serious mistake to do anything that would put it at risk.”

Ms Segars said: “These plans would cause massive damage to UK pensions and undermine economic growth across Europe. Instead of making pensions more secure, they would have the opposite effect.

“The UK already has a strong system to protect pensions. During these tough economic times, Europe should focus on fostering growth and job creation instead.”

I don't know if Solvency II will deal a death blow to UK defined-benefit plans, but these proposals are dumb because they treat pension plans like insurance companies. Pensions invest in long-term assets and should not be treated like insurance companies. This "large cash buffer" is stupid for pensions and doesn't make policy sense.

As far as Solvency II forcing UK pensions to take on more risk in equities, that's exactly what the world's financial oligarchs want from all pensions. Central banks will keep rates low for as long as possible to force savers out of bonds and into risk assets. Of course, bonds have outperformed all asset classes in the last three years and continue to be misunderstood. Even the bond king got clobbered last year betting against bonds (Hint: Austerity is great for bonds).

More worrisome, the UK is still in the throes of a recession. Austerity hasn't been working, in fact, it's hurting the UK economy, just like it's killing the Greek economy. I repeat what I have often stated on this blog, the developed world doesn't have a debt crisis, it has an unemployment crisis, which will inexorably add pressure to the debt problem.

Policymakers in the UK and elsewhere who are hell bent on cutting everywhere should think carefully about the effects of their policies. I'm not saying now is the time to spend like crazy or not to cut government waste, but policies heretofore are misdirected and are failing to address the real economic plight of our time, namely, youth unemployment and lack of jobs in general.

Below, my favorite contrarian indicator. Neel Kashkari, head of global equities at Pacific Investment Management Co., talks about the equity market, investor sentiment and investment strategy. He speaks with Betty Liu and Dominic Chu on Bloomberg Television's "In the Loop."

Ignore Kaskari's dire warnings and keep buying the dips on risk assets. The biggest tail risk right now is a massive melt-up in stocks, especially high beta stocks. Those who fail to understand this will underperform their benchmark and top funds in 2012.