EU pension directive could cost £210m a year - DWP

A consultation published by the Department of Work and Pensions (DWP) on the proposed European Directive on the portability of occupational pensions, suggests it could cost employers and employees an extra £210m a year in contributions.

Following the publication of a draft Directive from the European Commission in October, the DWP issued the report to gauge industry views on the potential impact of the directive on UK pension schemes, and to help it in negotiations with other member states.

The Portability Directive has four key elements relating to the acquisition of pension rights, preservation of dormant rights, transfers and information.

In the introduction to the consultation, which will close on the 13 March, the DWP says it’s negotiations, on the Directive, aim to limit any adverse cost impact on supplementary pension schemes, while establishing a realistic framework to allow mobility throughout the EU.

But some parts of the proposals are unclear, one example is what a supplementary pension scheme actually is. The consultation says it is the Commission’s intention that all pension schemes which have a direct link to the employment relationship will be classed as a supplementary pension scheme.

However, the DWP points out, in the UK, personal pensions can also be linked to the employment relationship, such as Group Personal Pensions and Employer Nominated Stakeholder Pensions, and a potential issue is that at this stage in negotiations, it is unclear whether these schemes will be included.

This ambiguity is important as it affects the potential costs some parts of the Directive could have on UK pensions. If employer nominated stakeholder pensions are covered, then the DWP concludes minor changes can be made to current rules to allow the UK to comply with the Directive with relatively little cost to employers and employees.

But if these schemes are not included then costs to employers and employees could be as much as £210m a year in extra contributions. However this figure is dependent on another possible ambiguity.

One part of the draft directive is intended to introduce a minimum age of 21 for the vesting of pension rights, but the way the text is currently drafted could mean workers would have to be 21 before they could join a scheme.

If this remains the case and a minimum entry age is introduced, the Directive could cost an extra £50m in employer contribution and an additional £20m in employee contributions.

And plans to limit the waiting time to join a pension scheme to one year, again depending on the definition of what a supplementary pension scheme is, could result in an extra £100m a year in employer contributions, which would affect those schemes with waiting times of more than a year.

Implementing this part of the Directive would also increase employee contributions by £40m a year bringing the extra contributions per year to a total of £210m.

The DWP says that although the Pension Portability Directive could impose some significant changes, it adds it is just the first draft of the Directive and that the negotiation process is continuing.

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