By Claire West

Proposed EU pension changes would force £350 billion (€440 billion) of extra costs on UK businesses, hit long-term growth by a potential 2.5%, slash 180,000 jobs and cut the value of pensions, according to independent analysis commissioned by the CBI.

The European Commission wants to impose a new funding regime for pensions, which would force employers to divert hundreds of billions of Euros into defined benefit schemes.

Under the plans, pension schemes run by individual employers would be required to implement similar changes to those proposed for insurance firms — which under the EU’s “Solvency II” process would have to hold enough funds to pay out for a once-in-200-years catastrophe.

But the analysis, by independent economic consultants Oxford Economics, backs up the CBI and other European business leaders’ views that the reforms would be a “disaster”, when the long-term economic outlook across Europe is so uncertain and fragile.

The CBI says the reforms are “wrong-headed” as pension funds, unlike insurance schemes, never have to pay out all benefits at once. Pension liabilities are spread across many years, as workers retire over time and can call on additional funds from employers if needed.

It says the proposals would force firms to cut jobs and to pass costs on to customers and employees to meet the extra demands from Brussels.

And it says the plans would require pension schemes into "low-risk" investments in "safer"products such as government bonds — reducing returns and forcing up costs for employers, as well as discouraging funds from investing in long-term assets such as infrastructure.

The proposals are part of the Commission’s proposed review of the Directive for Institutions for Occupational Retirement Provision (IORP), which lays down EU-wide rules to strengthen pension security. It is inspired by the ongoing Solvency II process — a fundamental review of the capital adequacy regime for the European insurance industry.

CBI Chief Policy Director Katja Hall said:

“Imposing £350 billion more costs on business would be a disaster for the economy and for pension saving. The long term economic outlook is so fragile and uncertain that it is crazy to entertain proposals which would cost jobs and cut so deeply into our long-term growth and competitiveness.

“Workplace pensions are vital to ensuring people have enough money for their retirement when life expectancy is rising — so future generations are not hit with huge bills or driven into poverty. The European Commission’s wrong-headed proposal will do nothing to help us cope with the burden of retirement.”

On proposed changes being unnecessary in the UK

The CBI argues that the changes are completely unnecessary in the UK, where pensions already have robust regulation to ensure employers have set aside enough money to cover long-term costs. Pensions are guaranteed by businesses and have a robust safety net from the Pension Protection Fund.

Ms Hall added:

“We have a tough regulatory system in this country, so these changes are completely unnecessary. It’s alarming the Commission is still turning a deaf ear to calls from businesses, trade unions and pension funds to bin these proposals.

“The European Commission must leave individual EU members to deal with their own retirement saving systems, as they do at the moment — rather than imposing a new system from the centre.”

On discouraging pension fund investment in infrastructure, Ms Hall said:

“European pension funds hold total assets worth over £3 trillion - a large proportion in the UK. These are exactly the long term sources of finance we need to tap into to get our economy moving — backing industry and entrepreneurs. Forcing funds to invest elsewhere could undercut billions of pounds of long-term infrastructure funding when public finances are so tight.”

The key findings of the analysis by Oxford Economics show, if the regime were implemented now:

• UK businesses would be hit by £350 billion of additional costs to fund the changes — cutting investment by 5.2% a year in the mid-2020s if the scheme was introduced in the next two years, with an annual shortfall of 1.4% still being felt in 2040; cutting productivity and capital stocks.

• UK GDP growth would be 2.5% lower over the first 15 to 20 years of a new regime, than in the absence of any regime change. It would still be 0.6% lower than otherwise even 30 years into the new scheme — with a 1.5% average annual GDP loss over the whole period.

• Employment would be cut by 0.5%, or 180,000, by the the mid-2020s — as a direct result of the changes, with subsequent revival dependent on cutting wages or hours.

• A shift in pension funds’ financial portfolios away from equity would pose clear additional downside risks to the real economy, by weakening the ability of small innovative growth firms to raise money for expansion and by increasing the risk of business liquidation.

• Investment in lower return-seeking assets by pension funds’ would lead to higher deficits which in turn would result in further calls on employer funds.

• Annual export volumes would fall short by 2.1% in the mid-2020s due to reduced cost competitiveness. In turn, this would cut imports and direct cross-border investment.

• Living standards would be hit — with consumer spending 2.0% lower in real terms in the late 2020s than otherwise, with a shortfall of 1.4% still in place in 2040.