Cicero Policy Briefer

Issue 21, February 2008

Will EU sales regulations scupper UK pensions reforms?

By Mark Twigg

With the UK pressing ahead with some of the most fundamental reforms to its pensions system for 50 years it has become apparent that Brussels may have—albeit inadvertently—thrown a potential spanner in the works.

The UK proposals aim to introduce a new national pensions scheme by 2012, which seeks to overcome the apathy of large numbers of employees, many millions of whom currently fail to sign up to their existing employee benefits. Certainly the experience of occupational DC schemes has been mixed during the past decade. Participation rates in most employer-sponsored defined contribution schemes languished at less than half of the eligible workforce. The message was that voluntarism is dead, long live ‘soft’ compulsion. Step forward the proposed personal accounts, which will employ the mechanism of automatic enrolment into company pension schemes, alongside contingent employer contributions worth 3 per cent of salary.

However, it is clear that when the UK’s Pensions Commission was considering the merits of auto-enrolment three years ago, it hadn't occurred to them that EU regulation might get in the way. The problem concerns the impact of regulations which seek to prevent inertia selling in retail financial services markets. Personal accounts, as a form of contract-based pensions provision, will be considered as retail products and will thereby fall within the scope of regulation.

The political orthodoxy in Westminster is that the UK has nothing to lose by pressing the issue wholeheartedly with our colleagues in Brussels. After all, the EU Commission had never intended to capture personal accounts within the scope of the regulations covering either distance selling or unfair commercial practices. It is not unreasonable therefore that the UK should seek to secure a derogation. However, with opposition parties in Parliament raising concerns that the Government is not fighting the UK's corner, the outcome remains far from clear.

Mike O'Brien, the Pensions Minister, has claimed that discussions with Brussels have been positive, though he also cautioned that it might not be possible to secure a positive resolution until the planned review of the regulations in 2011. This, of course, will be far too late to give pension providers the certainty they need to prepare for selling pensions post-2012. The Minister is hedging his bets just in case; the Pensions Bill currently making its way through Parliament provides a possible exemption for insurance-based schemes to opt out of auto-enrolment.

However, for that to happen suitable alternatives to auto-enrolment would need to be sought and those alternatives would need to secure similarly high participation rates. The two options on the table—namely, the option of master trusts or so-called 'streamlined joining'—both have their detractors. And neither would be cost-free. So the emphasis at this stage is clearly on securing an early win in Brussels. This would surely prove a win-win not just for the UK Government but also the EU Commission. By accommodating the UK, the European Commission could do a lot to enhance its reputation in the UK at a time when its recent endeavours—notably the Financial Services Action Plan—have resulted in swathes of regulation, generating additional costs on industry, without necessarily generating the promised benefits for consumers. Perhaps Commissioner Charlie McCreevy, who is set to step down during 2009 and with one eye on his legacy, could apply some of his much lauded laissez-faire to what is clearly nothing more than an unintended consequence.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.