'Hundreds' of DB pension sponsors to face 25% increase in DRCs

Around 300 firms sponsoring defined benefit (DB) pension schemes could face a 25 per cent uplift in their deficit reduction contributions (DRCs), primarily to make up for failing investment returns, according to analysis by LCP.

The analysis focused on research from The Pensions Regulator (TPR), which looked at how the latest tranche of schemes, whose valuations are due between September 2020 and 2021, are likely to have fared over the past three years.

This research revealed that, on average, schemes with a valuation date at December 2020 will have a worsened average deficit, perhaps by as much as 50 per cent, whilst those with a valuation date of March 2021 will have seen the average deficit fall, at times by as much as 50 per cent.

However, LCP pointed out that there is a “big variation” around these averages, as TPR estimated that, for schemes with a March 2021 valuation date, over half (52 per cent) were in deficit at the last valuation and will still be in deficit at this valuation.

For schemes that have remained in deficit, TPR has estimated that two-thirds (66 per cent) would need to increase their DRCs if they were to stay on track to clear their deficit on the previously agreed schedule.

Nearly half of these schemes would need to increase DRCs by at least 25 per cent, whilst around one in 25 would need to treble their DRCs.

In light of this, LCP has warned that "several hundred" schemes in this tranche could face an increase of more than 25 per cent to their DRCs, with the additional bill running into "hundreds of millions of pounds a year".

Furthermore, whilst it acknowledged that companies could seek to reduce the impact of these changes by pushing back the end date of their recovery plan, it clarified that TPR’s new DB funding code could see further pressure on employers to close deficits quicker, meaning that the pressure on firms to clear pension deficits is unlikely to ease.

However, it noted that the use of contingent funding could be one alternative route for pension schemes, for instance, by offering company assets as security in the event that the scheme is unable to meet its pension promises.

LCP partner, Jon Forsyth, commented: “Although some pension schemes have made progress on the funding of their scheme, there are still many that are no nearer to clearing their deficits than they were three years ago.

“Despite billions of pounds worth of employer contributions going into the schemes, adverse market movements mean that they have been running to stand still.

“To keep to their original timetable for clearing deficits, the regulator’s analysis shows that hundreds of employers may have to hike their contributions, in many cases by more than 25 per cent.

“As a result, we expect the employers sponsoring such schemes will be looking to explore other options including providing other forms of security to the pension scheme or extending the deadline to clear the shortfall.”

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