New DB funding rules could cost British industry £34bn

New funding rules for defined benefit (DB) pension schemes could cost British industry up to £34bn, based on official estimates included in The Pensions Regulator's (TPR) consultation documents, LCP analysis has suggested.

LCP detailed that, prior to the publication of TPR's consultation in December there had been no official estimate of the impact of the new rule included in the proposed funding code, which would require pension schemes to be funded on a low dependency basis by the time there are significantly mature.

However, LCP pointed out that when TPR published its consultation documents in December they included an estimate that the cost to firms of the new rules could be up to £34bn.

This estimate was conditional on all DB pension schemes that are currently funded below the proposed level “levelling up” to the prescribed level, and assuming that none of the schemes that are currently funded above that level chose to “level down”.

However, LCP suggested that this £34bn figure is likely to be an upper estimate of the potential cost, as TPR’s estimates were based on market conditions as at March 2021, and scheme funding will have generally improved since that date.

In addition to this, LCP noted that some schemes may seek to adopt a “bespoke” funding package, for example because their sponsor offers strong financial support or pledges so-called “contingent assets” to stand behind the pension scheme, providing greater security and reducing the need for an immediate injection of cash.

Even if the final figure turns out to be lower than this, LCP stated that there can be "little doubt" that for some employers these new rules will represent a significant new or additional burden.

Indeed, LCP argued that for some firms it may be impossible to meet the new rules while also remaining solvent, warning that this could lead to cutting member benefits as a result.

LCP partner, Michelle Wright, commented: “The government needs to be open about the potential impact of these new funding rules.

“The legal requirement to improve funding for schemes will apply at the first regular “valuation” of the scheme as soon as the new law is passed, which for some could be later this year.

“Employers could face demands from pension schemes collectively running into tens of billions of pounds over the following five years or so.

“Whilst everyone wants to see company pension schemes properly funded, this needs to be done in a proportionate way, rather than imposing rigid new rules overnight.

“In many ways, these new proposals are responding to the funding problems of years ago, when today’s world of pension scheme funding looks completely different.

“There is still time for the government to think again and give schemes and their employers time to adjust to the new funding regime.

“Without this, some businesses could find they simply cannot afford what they are being asked for and could be at risk of insolvency, which is an outcome in no-one’s interest.”

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