Can one size fit all?

With the dust only just settling on Solvency II's passage through the European Parliament, the European Commission has moved its attention to whether the European Union (EU) should take a similarly harmonised approach to pension solvency.

For proponents of the move, the case for harmonisation is simple. The purpose of pension schemes is exactly the same as for those investing in insurance life products, so why should the latter set of consumers have a great deal of protection while the former does not?

The logic for this stance is compelling and sits firmly within the Commission's remit to create an unfettered free market that provides equal access by consumers to goods and services across the EU. However, it ignores the reality of the polyglot pension systems of the EU's component states. These range from the fully funded insurance-type approach that is standard in countries such as Denmark and the Netherlands, to the unfunded book reserve system that has worked successfully in Sweden and Germany for the past half century.

And while the insurance sector is heavily populated with multi-national companies whose products and employees are spread across Europe and beyond, pension schemes are almost uniformly national. Even dual-nationality companies such as oil major Shell have shied away from creating a single pension scheme for their employees.

The complex web of taxation and social security issues that make a truly transnational pension scheme viable has yet to be unravelled and is unlikely to be until both of these issues are harmonised at an EU level - an unlikely prospect in the near future.

Even if these issues can be circumvented outside a radical overhaul of the structure of the EU, the nominal parallels between insurance and pensions do not stand up to closer scrutiny. While an insurer that erodes its risk capital only has the vagaries of the market to nurse it back to health, pension schemes have sponsors that can - and have in the recent turmoil - take steps to pay off deficits.

UK telecommunications firm British Telecom, for example, recently cut its dividend by 60% in a bid to claw back some its £2.9 billion pension deficit. And even in the Netherlands, with its admirable culture of fully funding pensions, schemes still have the steering mechanism of reducing pension payments in the face of declining solvency. As the policyholders of the UK's Equitable Life found to their cost, such an instrument is not available to insurers whose guarantees are regarded as legally rock solid.

The fact that this kind of certainty is not applied to pension provision is clearly demonstrated by the actions of various governments this month to raid pension assets in a bid to combat economic stagnation (see European governments kick-start economies with pension reserves, page 4). The Danes, Norwegians and Irish have solid reasons for raiding their country's pension reserves, but it is impossible to imagine them taking similar actions with the assets of their country's insurance sector.

Speaking to Life & Pensions when this issue was raised 12 months ago, Karel van Hulle, head of insurance and pensions at the Commission's internal markets division, said that any measure would need to take account of the characteristics of domestic systems, which begs the question - what is the point of attempting additional harmonisation?

The importance of a cohesive pension system to the functioning of the broader economy is unarguable and the Commission's desire to protect policyholders is a laudable aim. But the obstacles to increased harmonisation are huge and the benefits unclear, and it is difficult to escape the conclusion that the Commission would be better placed looking at other initiatives to protect European consumers.