United Utilities has set up a special risk management group to deal with the impact of changes to the state pension due in 2016, and has warned schemes not to ignore the upcoming reform.
Earlier this year, the government announced the overhaul – which centres on a single-tier state pension of £144 a week – would come into effect a year earlier than originally proposed.
Industry figures have warned that the reforms leave schemes with less time to prepare for the accompanying end of contracting-out, which may impose a significant burden on defined benefit schemes and employers.
Steven Robson, head of pensions at United Utilities, said the reforms were “creeping up” and warned an “awful lot” of high-level companies have not thought about what the changes mean and how schemes would budget for the extra cost.
“It’s going to be a major exercise and there is going to be a lot of resources needed,” Robson told delegates at the National Association of Pension Funds’ Regulation Conference last week.
He said United Utilities, which has a £92m funding deficit, set up a risk management group with representatives from the company, its legal, finance and HR departments, tasked with delegating any changes.
“At least we have a forum to talk about this,” he said. “As to how we are going to get to where we want to get to – it is a bit unsure. It is not going to be straightforward. We have got to communicate, we have got to consult.”
Robson said he also set up a working group with trustees and advisers to discuss risk management, and was working with his legal advisers to assess how the government’s statutory override – allowing employers to change scheme rules to offset the increase in national insurance contributions – would work.
He called for schemes to ask their administrators about how many members were contracted-out, and for the government to clearly define the regulations.
Insurer Axa named the abolition of contracting-out and the consequent increase in costs for employees as one of the factors in its decision to review its UK defined benefit pension scheme”, which it called “one of the biggest risks to the business” as reported in April (PW 01/04/13).
Also speaking at the NAPF conference, Bridget Micklem, head of private pensions policy at the Department for Work and Pensions, told delegates: “While we don’t expect many employers will have to use it because they will be able to negotiate with trustees, the override will allow employers to make changes up to the value of the NI they need to recoup, if necessary without trustee consent.”
The DWP was considering whether the override should apply to members covered by the protected persons regulations, a matter she said was “very difficult”, reporting a large response to the earlier consultation.
Malcolm McLean, consultant at Barnett Waddingham, said: “I suspect many employers would not wish to be seen to be riding roughshod over the wishes of their trustees and members, and may want to at least go through the motions of consulting.”
Many employers are already struggling with the cost of their schemes, and the extra burden of the accelerated reforms could “be the last straw in influencing them to close down their schemes altogether”, McLean added.
“The alternative is to look to make savings by either increasing the level of the employee’s contributions into the scheme or reducing the accrual rates.”
