Membership of the EU guarantees British insurers the right to do business in 27 other countries on an equal footing. The UK gains from this arrangement, selling more in insurance and long-terms savings products to the rest of the EU than they sell to us. Ahead of the EU Referendum on June 23rd, the ABI is producing a series of blogs exploring the role of the EU in our industry in more detail.
Huw Evans, Director General, Association of British InsurersWith only three weeks to the EU Referendum, the impact of the EU and possible 'Brexit' on pensions has gained sudden prominence. Last week, the Pensions Minister, Ros Altmann warned that 'Brexit' would hit pensioners hard, prompting some excitable headlines about 'How EU meddling slashed £15,000 off your pension'.
Unlike some of the commentators and politicians, the ABI has spent the last decade immersed in some of the EU policies that are now being quoted in evidence as a reason for 'Brexit'. So it is time to juxtapose some of the facts against the allegations:
Allegation 1: Record low annuity rates are down to the EU.
There is no one single reason to explain annuity rates but the main factors behind low current annuity rates are that UK interest rates are at a sustained record low and returns from gilts are also very depressed.
Interest rates are set by the Bank of England, not in Brussels and gilt rates reflect wider supply & demand market factors for government debt. Annuity volumes have also fallen since the 2014 Budget announcing the Freedom & Choice reforms which were passed by the UK Parliament, not Brussels.
The only factor that is directly relevant to annuity prices is the 2011 European Court of Justice ruling which forced the Gender Directive to outlaw differential annuity pricing for men and women. This has resulted in a marginally improved deal for women at the expense of men but has not been demonstrated to have had a major impact.
Allegation 2: The EU plans to force British employers to fill pension scheme gaps.
This is no longer true. This plan has been dropped from the IORP 2 proposal which instead focuses on improving governance and transparency of workplace defined benefit pension schemes and the Commissioner responsible, Lord Hill has said publicly it will not be reintroduced.
Achieving this was possible because of strong British leadership within Europe, working with the Dutch, German and Irish markets to oppose it. Far from demonstrating a threat, this is a good example of the UK using its leadership position within the EU to safeguard British interests.
Allegation 3: The EU has forced insurers to over capitalise.
Again, this is a flawed argument. Solvency II is an EU directive but it has been based on the UK ICAS system of prudential regulation of insurers that was introduced in the UK over a decade ago.
It is true there has been concern from the insurance industry that very stringent capital levels risk stifling innovation, make certain products like annuities less attractive and are economically inefficient. But setting the level of these capital requirements has been done by domestic regulators like the UK PRA, not by Brussels and there is no evidence whatsoever that they would be more relaxed if we were outside the EU.
If the UK were to leave the EU, it would still be required to follow the equivalent of Solvency II to be able to trade within it.
Allegation 4: 'Brexit' impact on pensions is scaremongering.
It is hard to argue - although some have tried - that any prolonged economic instability and lack of growth following 'Brexit' could not have some impact either on the value of current pensions or the ability of pension pots to grow to their full potential.
The UK's long-term savings industry is world-leading and well capitalised so of course it could cope with economic shocks and would aim to minimise their impacts for customers. But that is not the same as saying that 'Brexit' would be optimal for either today's or future pensioners.
Long-term pension investment benefits from strong economic growth, sustained contributions made possible by high employment levels and stable equity and bond markets. All would be put at risk by 'Brexit'.
There are wider reasons why the UK insurance and long-term savings industry mainly supports 'Remain' - not least because we sell more in insurance and savings products to the rest of the EU than they buy from us. As the largest insurance market in Europe, the interests of our customers and employees are best safeguarded by remaining in a leading position at the heart of EU decision making.
Huw Evans is Director General of the Association of British Insurers (ABI)