The Green Paper on pensions that is expected for publication this week by the European Commission could see defined benefit (DB) and defined contribution (DC) schemes suffer major losses, warns Hogan Lovells.

The law firm said that the Green Paper, which is expected to recommend the introduction of a regime for pension funding similar to the Solvency II directive for the insurance industry, will also recommend the development of an EU-wide benefit guarantee system.

Solvency II covers insurance companies and details requirements for the capital that they must hold to back up their liabilities. It does not apply to DB schemes in the UK. These arrangements are, however, subject to scheme-specific funding requirements under the Pensions Act 2004, although most UK schemes are required to hold a lower funding level than would be necessary under Solvency II.

The European insurance lobby, however, says Solvency II-type requirements should apply to occupational DB schemes, as this would ensure a level playing field between different pension arrangements.

“The proposals that funding requirements for defined benefit schemes should be increased is of concern,” explained Jane Samsworth, head of pensions at Hogan Lovells International LLP. “In the current economic climate, many sponsoring employers of DB schemes are already under considerable financial pressure and, in many cases, are already contributing as much as they can reasonably afford to make good existing deficits in their schemes.

“DB occupational schemes are not insurance companies and should not be treated as such,” Samsworth said.

Samsworth added that DB schemes have the benefit of the support of a sponsoring employer, who remains responsible for the scheme ultimately.

“As the Pensions Regulator has stated, ‘the best means of delivering the members’ benefits is usually for the scheme to have the continued support of a viable employer’. Proposals that would undermine the financial stability of many sponsoring employers are ill-advised and should be resisted.”

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