Anger grows over EU changes to pensions

26th June 2012

Saga director general and pension campaigner Ros Altmann has labelled new European rules governing insurance company capital requirements as dangerous to UK pensions.

Writing in the Daily Mail, she warns that the rules will "force all EU insurance companies to hold more Government bonds than before. So UK insurers will have to hold more gilts, which means that the interest rates on their assets will fall again, which means they will pay out even lower annuity income for each pension fund".

Last week, Mindful Money reported on a warning from consultancy Deloitte that the rules, known as Solvency II, could see some pensions fall by between five and a whopping 20 per cent.

The rules are designed to make insurance and pension companies stronger and more financially stable but Altmann is angry that the rules are far too broad brush and do not take the unique characteristics of the British system into account.

Although there are a number of strategies you can adopt when you retire, many people in private pensions or company defined contribution plans convert their investments into an income by buying an annuity from a pension company. This is broadly viewed as the safest strategy as it guarantees an income.

This pays an income for life but average rates depend on a wide range of factors including the pension company's views on life expectancy and the rates of return achievable in the gilt and corporate bond markets.

However the rate available when you annuitise is the rate you get for life so anything that makes buying the annuity more expensive is very bad news.

Altmann warns that 2012 looks like the peak year for people reaching 65 with around 400,000 to 500,000 people buying annuities each year. She says this is a particularly bad time for any new rules causing a hike in prices.

Campaigners such as Altmann may be making some headway, because the EU is examining the possibility of a ‘matching adjustment' to take account of volatility in asset markets which might cut insurers' costs and lesson the impact on income in retirement as Money Marketing reports. But as the trade paper reports it requires Parliament, Council of Ministers and the Commission to agree.

But at the moment, the risk remains that if you need to buy an annuity you may be paying more next year than this.


More on Mindful Money:

Investors could lose 20% of their pensions due to EU regulations

Pensioners hit hardest by quantitative easing

3 Ways we can stop the UK Pension meltdown

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