Hundreds of companies could be forced to inject an extra £5bn a year into their pension schemes, diverting cash from dividends and investment, under a major regulatory shake-up, experts have warned.
The Pensions Regulator is expected next week to unveil significant changes to the funding code governing the UK’s 6,000 defined benefit pension schemes, with a much tougher line expected on how quickly deficits are cleared.
Analysis by Lane Clark & Peacock, the pension consultants, suggested a stricter approach by the regulator, such as requiring deficits to be cleared in seven years, could lead to employers being asked to pay billions extra a year to their pension schemes.
Around half of DB schemes have a schedule of payments to clear their deficits, or a recovery plan, that set out the time of seven years or more, and a quarter have 10 years or more.
“We think it reasonable to assume that average recovery plan lengths will need to reduce by one to two years in response to the new funding regime,” said LCP. “This will increase contributions by around 20 per cent, which is around £5bn.”
Jonathan Camfield, partner with LCP, said: “A much tighter funding regime could easily have a multibillion-pound cost to British industry. In some cases this will inevitably lead to reduced capital investment and dividends.”
Mr Camfield said any added pressure on employers to divert more cash into their pension schemes may hasten the closure of hundreds of open schemes.
There are more than 2,500 defined benefit schemes where active members can still build up new pension rights.
A spokesperson for the Pensions Regulator said: “We do not recognise these figures. We note that LCP has not seen the full consultation document, and we will allow stakeholders ample opportunity to give us feedback over two stages.
“The DB Funding Code consultation will be published next week, which will set out our proposals for a clarified funding framework. We cannot know what the effects will be yet since this is the first stage of an open consultation. We are not consulting on a ‘draft’ code yet.”
The regulator added: “We are mindful of potential impacts on employers and will, after we receive feedback from this consultation exercise, carry out an impact assessment to make sure that member security and impacts on employers are appropriately balanced.”
The shake-up of the funding code comes several years after the regulator came under fire from MPs over its regulation of the BHS and Carillion pension schemes, which were left with deficits amounting to hundreds of millions of pounds when their sponsoring businesses collapsed.
Currently, employers and their pension scheme trustees agree a funding approach during three-yearly valuation discussions with the regulator, increasingly challenging the proposed plans.
But the new funding approach is expected to see the regulator pay much closer attention to funding plans that look to reduce scheme liabilities by adopting rosier outlooks on investment returns, or by relying on higher-risk assets to underpin the payment of pension promises.
“The political climate now is that the regulator will be lambasted if a company goes bust and the pension scheme is not well funded,” said Rosalind Connor of Arc Pensions Law, a legal firm.
“The regulator is likely to push schemes and employers towards a more standardised funding approach to protect members’ benefits.”
— to www.ft.com