Recent proposals from the Department for Work and Pensions on the funding of defined benefit (DB) pension scheme could force many employers to put an end to DB schemes, according to pensions consultancy LCP.
The new regulations were published for consultation by the DWP in July.
LCP warned the new rules risk forcing all schemes into a ‘one-size-fits-all straitjacket’ which could lead to more scheme closures.
Mr Webb and pension consultancy LCP warned that up to 5% of sponsoring employers could be at risk of insolvency due to being asked for unaffordable levels of contributions to their DB pension scheme under the new rules.
Under the regulations, all DB schemes will have to reach a state of ‘low-dependency’. This means that schemes have to plan to reach a funding level where no additional funding is expected to be needed from the employer, and then to lock in that situation by means of a low-risk (and low-return) investment strategy.
This goal has to be reached by the time they are ‘significantly mature’, which for a typical DB scheme means their members have mostly retired.
Analysis of LCP clients suggests that around 10% of UK schemes could already be regarded under the rules as ‘significantly mature’ and would have to move to a low-risk investment strategy.
LCP said that it is a ‘one-size-fits-all’ solution which does not reflect the diversity of the DB pensions world and will be unsuitable in a number of cases.
For scheme who have an employer who does not have the resources to top up scheme funding to the required level in time, LCP said full funding could be achieved if the scheme was able to take an appropriate level of risk but the new rules will cut off this option.
Jonathan Camfield, partner at LCP said: “Until now we had been promised that the new funding regime would be flexible enough to take account of the circumstances of individual pension schemes and their sponsoring employers. But now it seems that DWP is determined to ultimately force all schemes into a one-size-fits-all straitjacket.
“Being able to invest for long term growth and take an appropriate level of investment risk is a key part of the strategy for many pension schemes, and is critical to mutual survival of the scheme and the employer in some cases. But this long-term flexibility is being dramatically reduced by these new regulations.
“The very real risk is that some employers will face insolvency if they are forced to plug shortfalls in pension scheme funding at pace and with minimal reliance on scheme investment returns. Other employers could also find themselves being forced to pump in more cash than is needed – money that could be spent investing in their business or paying better wages to their staff to help them through current cost of living pressures.”
LCP said it is concerned that DWP has not undertaken an impact assessment of the shift in policy, particularly at a time when economic growth is under threat.
The DWP has said that the impact of the new regime can only be assessed once The Pension Regulator’s funding code has been published, but the regulator is only expecting to publish its code for consultation once the regulations have been finalised.
