The CBI has urged the UK Government to resist plans by the European Commission to treat defined pensions schemes as insurance contracts.

CBI argues that imposing inappropriate and costly solvency standards on pensions would harm sponsor companies’ ability to invest, calling them “a terrible idea” which would impact on jobs and growth. In a speech to the CBI Pensions Conference, held at the Royal Society, Katja Hall, CBI Chief Policy Director, will say: “We need the UK Government to step up to the plate in Brussels and stop the imposition of insurance-style solvency standards on defined benefit pension liabilities. The Government can do a lot more than it has to date. “This issue affects all businesses with defined benefit liabilities, whether or not they have closed the scheme.

“The proposal is a terrible idea, based on a wrong-headed insistence that defined benefit schemes are the same as insurance contracts. The potential effects are very significant, and would massively undermine the Government’s economic goals.” Outlining how the Commission’s proposals would impact on investment, jobs and growth, Ms Hall will say: “At its worst, this represents an increase of almost half a trillion pounds on total liabilities. That’s money that will have to be paid by the schemes’ sponsoring employers. This will divert money away from business investment in growth and jobs at a critical time, and harm prospects for investment in infrastructure.

“European pension funds hold total assets worth over £2000bn and a large proportion of this is in the UK. Removing the need to seek a significant return on investments could lead to a massive flight from equity and corporate bond investment towards high-grade government bonds. “We estimate that schemes that comply with Solvency II would need to sell equity worth over £800bn. “With the volatility that we have seen in international money markets, pension funds piling into more secure government bonds would push down yields and create even more pressure on sponsors as investments fail to deliver.” Arguing there is “no reason” for the changes, as there is already protection which has proven itself during the economic crisis, Ms Hall will say: “We have told the Commission, trade unions have told the Commission, the pension funds have told the Commission. But they don’t want to listen.”

Commenting on the major pension changes on auto-enrolment being introduced for all employees in 2012, Ms Hall will say:

“Thanks to the phasing and staging the CBI fought so hard to secure, the introduction of additional cost to employers will be spread for many years, allowing it to be off-set. What seemed like a nice-to-have flexibility in the good days is today keeping the reforms alive by providing much needed breathing room for employers. “But let’s not kid ourselves. For auto-enrolment to be successful in the long-term we must acknowledge that in the early years things are not going to go exactly as we hoped they would. “Big squeezes on household incomes mean that many people do not have much cash to spare for saving at the end of the month.

Not until re-enrolment from 2015, when hopefully we will be out of the economic wilderness, are we likely to start seeing the positive power of inertia keeping people in schemes. “What’s important is getting people into saving across the cycle, not with a bang in the midst of very tough times. Although opt-outs will be higher than expected, the plan is robust enough to cope.”