Hike funding

DB funding rules could render 200 employers insolvent

The consultancy is urging the government to rethink its ‘tough’ new rules on pension funding, warning they could affect the government’s growth agenda and bring 200 employers to the brink of insolvency.

It could also lead to reduced benefits for some scheme members, which would be a perverse outcome given that the aim of the new funding rules is to increase the security of these benefits.

The new scheme for funding defined benefit schemes is introduced under the Pension Schemes Act 2021. The Department for Work and Pensions (DWP) is rewriting legislation while the pensions regulator is revising its funding code.

The draft plan funding regulations are expected to come into effect by the end of 2023. However, LCP wants the government to provide more flexibility to plans and employers who need more time to reach the level of desired funding.

The consultancy is particularly concerned about the requirement that schemes be funded on a ‘low dependency’ basis when they are ‘significantly mature’. This is when most of its members are retirees and have a “low dependency” on the employer if there is a high probability that the scheme will be able to generate the returns needed to meet all pension promises.

This is achieved by adopting a low risk, low return investment strategy on the date the scheme reaches maturity.

LCP said the problem is that a significant number of plans had planned to meet their funding goals by investing for growth for a longer period, which means sponsoring employers will have to invest more money sooner s ‘they must introduce a low-risk, low-return investment strategy sooner than expected.

This will mean less money to invest in their business and those who cannot afford to increase their pension contributions will experience growing financial hardship and could be forced into insolvency.

For example, a plan funded by a company of 5,000 employees that is “significantly mature” but needs to take modest investment risk to make up its deficit would need a sudden and large injection of cash to meet the new rules of funding.

LCP warned that this “could wreck the company’s investment plans, threatening its long-term future, and at worst could force the business to close”.

The consultancy also said the new funding rules could create volatility for employers, as the date they are “significantly mature” could vary significantly over short periods, given that it varies depending on market conditions.

The firm’s research found that the deadline for a scheme client to achieve low dependency would have been moved four years to 2022 under the new scheme.

LCP partner Jonathan Camfield said the regulations were “unnecessarily rigid” and urged the DWP to rewrite the rules to strike a better balance.

He explained: “The result will be an unnecessary increase in the amount of money employers are expected to invest in pension schemes, to the detriment of their ability to invest in their own future. And for some employers, these increased requirements could be the straw end that pushes them into insolvency.

“At a time when there is so much emphasis on economic growth and stimulating business investment, this does not look like a united government. The DWP needs to rewrite these rules to strike a better balance between the safety of regime members pensions and avoid burdens for the employers who support them.”