On the go: Open defined benefit schemes could see their liabilities increase between £120bn and £160bn due to the new funding rules proposed by the Pensions Regulator.
The warning was made by the £30bn Railways Pension Scheme in written evidence to the House of Commons Public Bill Committee on the pension schemes bill, urging the government to retain an amendment to Clause 123 to make provision for open schemes to be treated differently to closed schemes.
The issue at heart is TPR’s new DB funding code, which proposed a twin-track DB funding approach that aims to reduce average scheme dependency on sponsoring employers.
The Railways Pension Scheme stated that the current regime allows open schemes to invest in a way that reflects their particular characteristics.
Under TPR’s proposals, “there would be significant additional (and unnecessary) costs” imposed on open schemes as they “would be forced into following the approach suited to closed schemes that delivers lower returns to members”.
Considering that no economic assessment of the new rules has been made, the Railways Pension Scheme conducted research with a cohort of open schemes — which represent an aggregate DB membership of 6m people with assets of around £370bn — concluding that these pension fund liabilities could rise up to £160bn.
“Companies will be forced to move billions of pounds unnecessarily from productive investment in their businesses to their pension funds,” the document read.
“This will reduce tax take, and damage the long-term health of the UK economy as a whole, just as the country recovers from Covid-19.”
The Railways Pension Scheme, which alone will see its liabilities increase to £15bn, stated that “open schemes will become unaffordable, leading to the premature closure of otherwise healthy schemes, contrary to government policy”.
“It will have a profoundly detrimental impact on more than 2m existing members of such schemes,” it added.
Railways pension fund officials are therefore asking the government to retain an amendment passed in the House of Lords in the summer — that would ensure that open DB schemes are not forced to derisk their investments in the same way as closed plans — which pensions minister Guy Opperman has moved to be withdrawn.
If that is not possible, the scheme has proposed its own amendment, which “provides the crucial protection that open schemes need without being too restrictive on the regulator”.
