The impact of new regulations in the pension schemes bill and the future defined benefit funding code will mean that sponsors of the UK’s largest schemes will have to fork out £100bn over the next 10 years, according to new analysis from LCP.
The modelling from the pensions consultancy takes into account schemes with assets of more than £1bn, or 10,000 members or more, which corresponds to 300 pension funds.
These schemes are the target of the analysis since they are “more likely to be targeting self-sufficiency, as they have the economies of scale to make this a more cost-effective solution than buyout in many cases”, explained Jamie Harding, senior consultant at LCP.
If these larger DB schemes were required to achieve full funding on a low-risk, gilts plus 0.5 per cent basis within the next decade, this would equate to £100bn in contributions, he added.
These contributions represent £100bn that is then not available for investment elsewhere in the UK economy, noting that for some sponsors the next few months and years will be critical for the solvency of their business
Jamie Harding, LCP
Mr Harding noted that a proportion of this figure — between £60bn and £65bn — is already expected to be paid under the current rules, “but under the new regime there is expected to be less flexibility and a requirement to pay more over a shorter timeframe”.
He added: “These contributions represent £100bn that is then not available for investment elsewhere in the UK economy, noting that for some sponsors the next few months and years will be critical for the solvency of their business. There are also likely to be Brexit headwinds.”
New rules to shake up sector
At the centre of this analysis is the impact of the pension schemes bill, which strengthens the Pensions Regulator’s powers and the existing sanctions regime, including the introduction of criminal offences.
The watchdog is working on a new DB funding code, with a consultation launched in March proposing a twin-track DB funding approach that aims to reduce average scheme dependency on sponsoring employers.
Rosalind Connor, managing partner at Arc Pensions Law, agreed that these are two forces that “will put a very much upwards pressure on pension funding”.
She explained that the new DB funding code “definitely focuses, among other things, on schemes that have already become fully funded on the present basis also funding for their separate long-term objective, which will push many towards a higher funding amount”.
Adding to this is the fact that TPR’s new powers under the bill have been “broadly drafted, so that they can be threatened for all sorts of activities”.
Ms Connor said: “It is certainly possible for the regulator to threaten them to ask for increased funding into schemes, or alternatively the very fact of their existence will make complying with regulator demands much more attractive for businesses.”
Even though the new rules might simply mean pension schemes get better funded, she noted that the question remains about how these powers will be used, “and whether the focus will be on the right schemes and on employers who can afford an increase without seriously damaging their business in these very uncertain times”.
In response to the criticisms to it new funding code, a TPR spokesperson said: “It is too early to tell what overall impact the proposed approach to the code will have on employer contributions and scheme deficits.
"We are carefully reviewing the responses to our first consultation and are yet to consult on fast track parameters. This will be informed by the new legislation, an impact assessment and reflect prevailing market conditions.
“We proposed a twin track approach to pension scheme valuation. However, neither option would force employers to put more money in to a scheme than they can reasonably afford to pay. One of the key principles we have proposed is that recovery plans should be driven by employer affordability.”
Calls for impact assessment from government
Former pensions minister and LCP partner Steve Webb noted that MPs will be debating the pension schemes bill next week (between November 3 and 5) “with almost no information about the scale of what is being proposed”.
He noted that if the government disagreed with the LCP estimate, “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”.
In response to LCP's analysis, a DWP spokesperson said: “Employers and schemes who are already following good practice and planning for the long term should not need to change what they are doing. It is only right that those employers who have not been funding schemes sufficiently may have to pay more.”
TPR to make changes to DB funding ‘fast-track’
Podcast: The Pensions Regulator will make changes to the fast-track approach proposed in its defined benefit funding consultation due to the impact of Covid-19, revealed its executive director of regulatory policy, analysis and advice David Fairs.
Ros Altmann, former pensions minister and member of the House of Lords, agrees that the current proposals by the regulator “would impose potentially draconian costs on sponsors of DB pension schemes”.
However, she alerted to the fact that one of the amendments passed by peers, regarding open DB schemes, which has now been taken out by government, will be another headache for scheme members.
Baroness Altmann said: “If the government does not ensure sponsors of open schemes are able to benefit from better expected long-term investment returns available from a diversified range of asset classes, which may have higher volatility than fixed income, then these schemes will be forced to close, the funding of the DB promises will become ruinously expensive, and members will be at risk of not receiving their expected benefits.”
