The pensions industry faces an annual cost increase of £818m as a result of changes brought in by the pension schemes bill, with the new defined benefit funding regime and the pensions dashboard requiring the lion’s share of this investment.
An impact assessment for the bill, recently reintroduced in parliament, revealed a surge in compliance costs in the year after it gains royal assent. After that, pension schemes, employers and providers will have a total ongoing cost of more than £85m a year.
According to the documents, published last week by the Department for Work and Pensions, the new DB scheme funding regime – which will require all final salary plans to appoint a chair, issue a statement explaining their funding strategy, and increase the Pensions Regulator’s powers to take action against trustees – will have a cost of £30m in the first year.
In March, the regulator will issue a new consultation seeking views on a revised DB funding code, which will reflect the new legislation.
The logical implication of these costs is to help schemes merge and reduce the ongoing overheads of compliance and monitoring, which cost so much more per member for small schemes than for larger ones
Baroness Ros Altmann
The regulator has been hardening its expectations of DB stakeholders in recent months, announcing a “comply or explain”-style framework in November, whereby schemes will be able to fast-track their valuation submissions if they fund to prudent valuation bases.
Schemes outside of this regime can expect more intense scrutiny from the watchdog.
While all 5,524 DB schemes in the UK will have a one-off cost of £1.46m with the new long-term funding and investment strategy requirements, only 852 pension funds are expected to have an ongoing expense of having to appoint a chair – which will depend on the scheme size, the DWP stated.
The ongoing cost of submitting an actuarial valuation to the regulator, even if the scheme is in surplus, will cost £9.4m a year for the 1,105 schemes estimated to currently have a positive balance.
Pensions dashboard to cost £774m
The biggest funding requirement for the industry, however, will be due to the introduction of the pensions dashboard.
According to the government’s assessment, there will be £2m of familiarisation costs with the project for the 30,272 private sector pension schemes in the UK, and an implementation expense of £717m, with the bill varying with the size of the pension fund.
After the first year, there will be ongoing costs of £55m a year for all the pension schemes in the country.
The DWP confirmed in December 2018 that it will seek to foster the creation of multiple pensions dashboards, with the first one developed by the Money and Pensions Service.
An industry delivery group brought together by the guidance body will set out a timetable for other fully operational dashboards, as well as setting standards and ensuring security across the portals.
Costs are justified
Former pensions minister Baroness Ros Altmann said it would not be right to “reject proposals designed to increase TPR powers or ensure pension schemes are better run, on the grounds of cost”.
She said: “Clearly, if there are increasing requirements there will be associated costs, but the logical implication of these costs is to help schemes merge and reduce the ongoing overheads of compliance and monitoring, which cost so much more per member for small schemes than for larger ones.
“The tail of small DB schemes and small defined contribution providers results in lack of economies of scale.”
When examining the potential impact of dashboards, in particular, benefits could far outweigh these costs. Profile Pensions research released last week suggested that £37bn could be sitting in unclaimed pensions, extrapolated from the Association of British Insurers' finding that 1.6 million pots are estimated missing.
David Everett, partner at LCP, said he is somewhat sceptical about impact assessments, since “the approach used to cost the impact of the proposed measures often don’t tell us the whole picture”.
Pensions dashboards unlikely to go live this year
Despite pensions dashboards having both industry-wide and government backing, it is unlikely that the technology will be delivered “any time soon”, Sir Steve Webb warned.
He said: “To take DB funding, if the legislation improves schemes’ funding positions it will be because, for example, it is forcing the pace on deficit repair contributions and also on investment derisking. More money and sooner from scheme sponsors.
“If the proposed limitations on the right to transfer results in a significant number of scheme members not falling for a pension scam, there will be a clearly beneficial impact on them.”
The DWP has stated this measure, which will apply to both DC and DB pension schemes and intends to prevent scams by increasing the requirements on pension transfers, will have a cost of £1m for providers and employers in the first year, while bringing ongoing benefits of £132,000 to businesses and £23m to individuals.
