LCP undertook some modelling focused just on the UK’s biggest pension schemes – those with assets of £1 billion or more or 10,000 members or more – just under 300 schemes in all. Under the new rules the sponsoring employers of these schemes may have to put in £100 billion into their pension schemes over the next decade, compared to around £60-65bn under current rules.
The new funding rules have been brought in as a reaction to high profile failures of company pension schemes such as Carillion and BHS. The two key strands of the reforms are:
The Pension Schemes Bill, due to be debated by MPs next week, which gives legal powers to the Pensions Regulator to take a tougher line with companies around pension scheme funding;
A new ‘Defined Benefit funding code’ consultation issued earlier this year by the Pensions Regulator which moves in the direction of giving companies less time to pay off deficits in their pension scheme and pushes them towards being much more cautious in what the pension funds are invested in.
Despite the fact that MP’s will be debating some of these changes next week when the Committee stage of the Pension Schemes Bill starts they have not been provided with an impact assessment.
The changes could be a real financial drain on firms as they also seek to invest to help the UK recover from the current economic downturn. Forcing pension schemes to take less investment risk and get less return means employers have to find more money now and shortening the time horizons for deficits to be cleared means even more money having to be found now for pension promises which run decades into the future.
Steve Webb, partner at LCP, commented: “Everyone wants to see people’s company pensions paid in full, but there is a real problem if government and regulators take too cautious an approach to the rules on pension scheme funding. If businesses are forced to move tens of billions of pounds away from productive investment in the economy and instead have to lock the money up in their pension fund, there is a risk that this damages the long-term health not just of the companies concerned but of the UK economy as a whole.
“MPs are being asked to debate these issues whilst being in the dark about the scale of what is being proposed. If the government disagrees with these estimates, it should now come up with its own figures as to the additional billions that are going to be required so that MPs can make an informed choice”.
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