Employers face ‘up to £34bn hit’ from new DB funding regime, says LCP
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by Stephanie Baxter
The new funding rules for defined benefit schemes could cost up to £34bn, according to pension consultants LCP.
In July last year, the Department for Work and Pensions published its draft ‘funding and investment’ regulations, while in December, TPR published a second consultation on its proposed DB funding code. The new rules are expected to come into force in October.
The consultancy’s figure is based on official estimates from one of the Pensions Regulator’s consultation documents.
The new rules require that pension schemes be funded on a ‘low dependency’ basis by the time they are ‘significantly mature’, with the definitions of these terms still to be finalised.
The proposed new law says that trustees should expect employers to pay down deficits “as soon as reasonably affordable”.
The problem is that schemes may not currently be funded at this level. It could mean employers receiving demands from schemes for large sums, collectively running into tens of billions of pounds, said LCP.
When TPR published consultation documents in December, they included in one an estimate that the cost to firms of the new rules could be up to £34bn.
LCP said this is based on if schemes which are currently funded below the proposed level were to ‘level up’ to the prescribed level, and assuming that none of the schemes which are currently funded above that level chose to ‘level down’.
Michelle Wright, partner at LCP, called on the government 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.”
She said it needs to be done in a proportionate way, rather than imposing rigid new rules overnight, while warning of the impact on British businesses:
“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.”
Is your sponsor worried about funding requests from the pension trustees because of the incoming funding regime?
Is your sponsor worried about funding requests from the pension trustees because of the incoming funding regime?
