12 February 2018
A law currently going through Parliament could add several billion pounds to the liabilities of company pension schemes, according to analysis by mutual insurer Royal London and pension consultants Lane Clark & Peacock (LCP).
A ‘private member’s bill’ prepared by Conservative MP Tim Loughton received an unopposed Second Reading in the House of Commons on 2nd February and would require the government to look into allowing opposite sex couples to register a civil partnership for the first time. At present, many pension schemes provide survivor’s benefits only to married couples or civil partners, whilst even long-term cohabiting couples may get little or nothing. Once such couples can register as civil partners they will have a strong incentive to do so, both for improved occupational pension rights and to access other tax breaks and benefits currently available only to married couples and (same sex) civil partners.
Such a change could add several billion pounds to pension fund liabilities, though the exact size of the effect is uncertain.
A survey by LCP suggested that around 15% of the liabilities of company pension schemes are in respect of payments to future widows and widowers of existing pension scheme members. As the total liability of private sector DB schemes is approximately £2 trillion, this would suggest roughly £300 billion is in respect of future widows and widowers. The question is how much this would increase if cohabiting couples could register a civil partnership.
In the UK there are roughly 12 million married couples and a little over 3 million cohabiting couples, so an extreme assumption would be that the bill for future cohabiting partners could add up to a quarter to the current £300 billion cost. The true cost is however likely to be much less than this. There are several reasons for this:
- The age structure of DB pension schemes is such that cohabitation rates are likely to be much lower among DB pension members than among the population as a whole; indeed, a standard assumption for a DB scheme would be that 80% of its members are married, and a good proportion of the remainder would be single rather than cohabiting
- Some of those who are currently cohabiting will go on to marry and therefore are already counted in the future liabilities of schemes
- Not all cohabiting couples will necessarily take up the right to register for a civil partnership
- Whereas pension rights for widows generally go back decades, rights for cohabiting partners might only start from the date the new legislation is introduced
- Some schemes already make provision for cohabiting partners to receive survivor’s benefits
For all of these reasons, the true cost to schemes of the new legislation is likely to be well short of 25% of current liabilities in respect of future widows and widowers. But even if it was just 1%, this would still represent an additional £3 billion in costs.
Commenting, Jonathan Camfield, Partner at LCP said:
‘We estimate that liabilities in respect of future widows and widowers probably account for around one pound in six of all the liabilities of DB pension schemes. Even a modest change to eligibility for survivor’s benefits could add a significant absolute amount to DB pension scheme costs’.
Steve Webb, Director of Policy at Royal London said:
‘Cohabiting couples currently miss out on a wide range of tax breaks, social security benefits and pension rights that married couples currently enjoy. Allowing such couples to register a civil partnership recognises changes in society, with cohabitation rates having doubled in the last twenty years. There can be little doubt that legislation of this sort will be implemented sooner or later and the pensions industry will need to make sure that it has thought through the implications of these changes’.