UK DB pension scheme funding proposal ‘risks corporate insolvencies, asset fire sales’

Proposed funding rules for the UK’s defined benefit (DB) pension schemes risk a fire sale of assets and could push some companies into insolvency, according to consultants.

Draft rules from the Department for Work and Pensions (DWP) published last month would require schemes to reach “low dependency” on its sponsoring employer and implement a low-risk investment strategy by the time they become “significantly mature”. This is defined as when a majority of scheme members have retired.

LCP argued that the move could put unsustainable strain on employer covenants. Jonathan Camfield, partner at the consultancy, warned that the proposal indicated that the department was “determined to ultimately force all schemes into a one-size-fits-all straitjacket”.

In addition, research from Mercer claims that for schemes to comply with the investment strategy rule as proposed could result in the forced sale of as much as £500bn (€592bn) of return-seeking assets. The consultancy also argued that the change in approach could add as much as £200bn in total additional liabilities to UK corporate balance sheets over the next 10-15 years.

Charles Cowling, chief actuary at Mercer, said the effect of implementing the DWP’s rule as drafted “would be significant and dramatic”.

“If adopted, these draft government regulations will significantly change the pensions landscape and make the operation of DB schemes more challenging, particularly smaller schemes,” he said. “Trustees work in the interest of securing members’ benefits and must be given the flexibility to take steps necessary to deliver on this responsibility in a proportionate and appropriate way.”

LCP’s Camfield added: “Being able to invest for long-term growth and take an appropriate level of investment risk is a key part of the strategy for many pension schemes, and is critical to mutual survival of the scheme and the employer in some cases. But this long-term flexibility is being dramatically reduced by these new regulations.”

LCP estimated that approximately 5% of DB schemes in the UK could be faced with a choice of retaining a higher-risk investment strategy in an effort to reach full funding – and thereby break the new law – or push for more money from the employer, which could force the company into insolvency.

Camfield added that even companies that were financially stronger “could also find themselves being forced to pump in more cash than is needed – money that could be spent investing in their business or paying better wages to their staff to help them through current cost of living pressures”.

“We are concerned that DWP have chosen not to undertake an impact assessment of this significant shift in policy particularly at a time when economic growth is under threat,” he said.

Cowling also questioned the government’s priorities. “The current proposals focus on DB pensions, rather than defined contribution schemes (DC) that millions of people currently working will rely upon in future,” he said.

“While we welcome efforts to encourage a safe and secure environment for member benefits, this should not come at cost of diverting scarce employer resources from the DC schemes that will deliver people’s pensions in the future.”

The DWP’s consultation is open until late October. The resulting rules will inform the long-awaited DB funding regime currently being planned by The Pensions Regulator.