Sponsoring employers of large DB schemes face £100bn bill under new funding regime

Proposals for a new funding regime could require sponsoring employers of the UK’s biggest pension schemes, with assets of £1bn or more than 10,000 members, to pay an additional £40bn over the next decade, according to analysis by Lane Clark and Peacock (LCP).

The firm found that proposals in The Pension Regulator's (TPR's) new defined benefit (DB) funding code, particularly the proposal to benchmark bespoke valuations against a fast track approach, could require contributions of £100bn from sponsoring employers of larger pension schemes, compared to around £60-65bn under current rules.

LCP senior consultant, Jamie Harding, stated that whilst a proportion of the £100bn contributions is already expected under the current regime, the new code is expected to have less flexibility with a requirement to pay more over a shorter time frame.

He also emphasised that this £100bn will then not be available for investment elsewhere in the UK economy, stressing that for some sponsors, the next few months and years would be “critical” for the solvency of their business, with Brexit headwinds also likely.

Furthermore, he noted that this also represents £100bn which is not available for defined contribution (DC) payments or for the ongoing employment of active members

Commenting on the findings, LCP partner, Steve Webb, added: “Everyone wants to see people’s company pensions paid in full, but there is a real problem if government and regulators take too cautious an approach to the rules on pension scheme funding.

“If businesses are forced to move tens of billions of pounds away from productive investment in the economy and instead have to lock the money up in their pension fund, there is a risk that this damages the long-term health not just of the companies concerned but of the UK economy as a whole.

“MPs are being asked to debate these issues with almost no information about the scale of what is being proposed.

"If the government disagrees with these estimates, it should now come up with its own figures as to the additional billions that are going to be required so that MPs can make an informed choice."

Harding echoed this, stating that ultimately it comes down to a political question about the best use of capital in the current economic climate.

"We just hope this is considered carefully by TPR when carrying out its impact assessment, and perhaps more importantly by the Department for Work and Pensions when the new regulations are being drafted off the back of the Pension Schemes Bill, as it is these regulations that will give TPR powers to impose the new funding regime," he added.

The £100bn estimate is based on the likely contribution levels if larger schemes were required to fund on the basis of an investment return of gilts +0.5 per cent and to become ‘self-sufficient’ within a decade.

The firm clarified however, that the rate of return is the upper end of that likely to be allowed under the new fast track regime, and that some schemes are likely to reach self-sufficiency quicker than a decade, noting therefore that these “are not extreme assumptions”.

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