3 March 2020
The new framework for funding company pension schemes put out for consultation by the Pensions Regulator today represents the biggest shake-up in pension funding for 15 years, according to experts at consultants LCP. In the wake of cases such as BHS and Carillion, the goal of the new rules is to improve the chance of pensions being paid. However, LCP analysis suggests that the new rules could lead to significant numbers of scheme closures over the coming years and a multi-billion pound increase in the total amount of money being paid by companies into their pension schemes each year.
Although the new rules are unlikely to be implemented until late 2021, and there are further rounds of consultation to come, the early shape of the new framework is now clearer. Key points include:
- A tighter legal framework around scheme funding, including the use of new powers under the Pension Schemes Bill currently going through Parliament;
- The majority of schemes will be expected to use relatively standard assumptions to measuring their deficit and on planning how to respond as part of a ‘fast-track’ valuation approach;
- Schemes which wish to deviate from this standardised approach will be allowed their own ‘bespoke’ approach, but only if they can convince the Regulator that there is a good reason and that their assumptions are backed up by hard evidence;
- Whilst some schemes will be largely unaffected, many will see an impact; those most likely to be affected are ‘maturing’ schemes, those where the strength of the employer looks less certain going forward, and those that are already facing significant funding problems;
- Impacts on affected schemes could include:
o Employers being expected to pump more money into the scheme and coming under greater pressure to prioritise pension contributions over dividend payments;
o Hundreds of schemes having to close;
o Faster ‘de-risking’, such as moving out of equities and into government bonds, or a faster move to transferring liabilities to an insurance company or pension consolidator;
o A much greater focus on long-term planning by schemes;
Commenting on the overall approach, Bob Scott, senior partner at LCP said:
"There is no doubt that these proposals, coupled with the laws currently going through Parliament, mean that the Regulator is going to be taking a tougher line on the funding of company pensions and represent a huge shake-up. There are still nearly 3,000 open defined benefit pension schemes and these proposals could easily lead to a wave of closures."
Commenting on the implications for trustees, Jill Ampleford, partner at LCP said:
"Pension scheme trustees will need to consider carefully how to respond to these proposed new rules. A realistic assessment of the strength of the employer who stands behind their scheme will be crucial in this new framework. Trustees will also want to consider whether additional ways of securing pension benefits - such as guarantees from parent companies or first call on certain company assets – could be used more extensively in future".
Commenting on the implications for employers, Jonathan Camfield, partner at LCP said:
"Although we have yet to see the final details, the direction of travel is clear. Some employers are likely to see a significant increase in the amount they have to contribute to their pension scheme, and the combined bill for UK plc is likely to run into billions of pounds. This will arise in particular from tougher rules on the timetable to clear pension deficits. Firms will also face more challenge over dividend payments where there is a pension scheme deficit".