Govt urged to rethink 'unnecessarily rigid' DB funding rules

The government has been urged to rethink defined benefit (DB) pension funding regulations, after LCP suggested that the new rules could risk “unnecessary” costs of up to £30bn, and could lead to up to 200 employers being forced to the brink of insolvency.

LCP encouraged the government to “think again” about what it described as “rigid” new rules, arguing that although the regulations are being introduced with the best of intentions, it is being done "in a particularly heavy-handed and inflexible way".

The issue focuses around a new requirement for schemes to be funded on a ‘low dependency’ basis by the time they are ‘significantly mature’, as LCP explained that a "significant number" of pension schemes had planned to meet their funding targets by investing for growth for a longer period, past the date of ‘significant maturity’.

If these schemes are forced to move to a low-risk/low-return investment strategy at an earlier date they will have to put more money in sooner, LCP warned.

While the extra funding for pension schemes is simply wasted expenditure for businesses that can afford it, LCP stressed that businesses who cannot find the additional money, including charities, will find themselves facing increasing financial difficulties and may even be forced into insolvency.

This could mean bad news not just for businesses, but also past and present employees who may end up with less valuable pension benefits, as LCP noted that the Pension Protection Fund (PPF) only covers 90 per cent of the pensions of those under retirement age, and may offer less generous inflation protection than the original scheme.

In addition to this, LCP's research highlighted the volatility that the new funding rules could create for employers.

It explained that although schemes will have to target a ‘low dependency’ funding level by a date when they are ‘significantly mature’ under the new regime, this date itself could vary substantially over short periods of time as it varies according to market conditions.

For instance, one scheme whose deadline date for reaching low dependency would have moved by four years during the course of 2022 had this regime been in force.

In light of the concerns, LCP has urged the government to re-think the draft rules, and to allow greater flexibility for schemes and employers which are serious about meeting pension promises but need more time to reach the desired target level of scheme funding.

LCP partner, Jonathan Camfield, commented: “Whilst everyone shares the goal of making sure that company pension promises are kept, these proposed regulations do so in an unnecessarily rigid way.

“The result will be an unnecessary hike in the amount of money employers are expected to put into pension schemes, to the detriment of their ability to invest in their own future.

"And for some employers, these increased demands could be the final straw which pushes them into insolvency.

“At a time when there is so much focus on economic growth and boosting business investment, this does not look like joined up government.

"The Department for Work and Pensions (DWP) needs to re-write these rules to strike a better balance between security for pension scheme members and avoiding unnecessary burdens on the employers who stand behind them”.

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