Morning Line: Eurocrats are right to interfere with our pensions

The financial crisis has revealed the unchecked profligacy of some of the European Union’s members. It has also shown just how bereft Brussels is of tools to help a failing member state without damaging its own reputation.

The European Union’s answer to this exposure of its weaknesses is greatly increased power. Control over monetary policy is no longer enough – the EU must supervise its members’ economic policy as well.

Perhaps most significantly, this would involve the scrutiny of each nation’s economic forecasts in what European Council president Herman Van Rompuy has said would be a reality check on governments' thinking about economic forecasts, inflation and financial strategy.

As part of this creeping economic power, the EU has designs on pension rules across its 27 members, and is due to launch a debate on Wednesday when it publishes a green paper. There are various reports as to what this thorough review of the pensions framework could entail. According to the Sunday Telegraph, which quotes employers’ group the Confederation of British Industry (CBI), rules could be introduced to force British companies to inject a further £500 billion funding into final salary pension schemes. Meanwhile the Financial Times reports that the European Commission will push for higher retirement ages, an issue which was put firmly on the agenda by the Greek crisis. 

The immediate concern for the UK draws on the perennial Eurosceptic’s argument – the threat of imposing a one-size-fits-all policy. In this case, there is concern that pan-European rules would not take account of the different types of pension schemes operated across the EU, nor the different regulatory structures in place. In the UK, we have the Pensions Regulator to supervise the industry and employers who administer pension schemes. We also have a life boat, the Pensions Protection Fund, which pays out compensation in the event of a scheme going bust. Not all EU members have such bodies. What’s more, the UK is already pressing ahead with its own plans to phase out the default retirement age. Will all of these factors be considered?

Aside from the concerns of the impact of pushing pensions policy under a singular framework, there are worries about the risk of the added costs that the EU rules could imply for British workplace pension schemes. The Sunday Telegraph quotes CBI deputy director general John Cridland’s concerns that the demands imposed by the measures would destabilise the economic recovery.

Added to the threat to employers’ finances is the danger posed by added layers of complexity for pensions that greater EU intervention would pose.

So should the EU do nothing and leave individual member states to sort out their own pensions provision?

The evidence from the UK suggests that this does not work. The EU talks of three pillars of pensions provision: government, workplace and private. These are all failures in the UK where both the government and companies have failed to adapt to changing demographics and health.

The state pension pays out a pitiful amount – in particular failing women who take time off to look after children and relatives – and the age at which people can claim it is set to rise (which it must do to cope with the growing elderly population). Means testing and saving for a pension don’t mix, a problem which the new – vastly expensive – NEST workplace pension scheme fails to account for.

Workplace pensions, which for years took advantage of rising stock markets to go on ‘pension holidays’ from contributions, now face huge deficits, forcing scheme closures. The payment of dividends to shareholders takes precedence over funding vast pension scheme deficits. If they continue closing at such a rapid rate then traditional final salary pension benefits will soon become a thing of the past.

And the final pillar of pensions provision, the individual’s own private provision, has proven an unmitigated failure, partly due to mass apathy and partly due to the lack of awareness of just how much you need for a comfortable time in retirement.

It is clichéd to talk of the ‘pensions timebomb’, but it remains an apt description for the race we face to defuse the threat posed by increasing longevity and a dwindling pensions provision. Perhaps the European mandarins may succeed where we have so obviously failed - we would all do well to read their proposals on Wednesday.