UK – The UK government’s proposals to amend the pension system will increase pressure on companies with significant under-funded liabilities, according to research by Dresdner Kleinwort Wasserstein.

DrKW says there are three amendments that could have an impact on the credit ratings of companies. They are the introduction of scheme-specific funding requirements and the setting up of a pension solvency insurance fund. The other change is that employers meet pension obligations in full if they want to close a scheme.

The proposal to replace the minimum funding requirement with scheme-specific funding requirements will result in a higher level of flexibility in terms of the amount and timing of contributions - which DrKW admits could be credit positive.

But there is also an increased risk that some companies might look to keep contributions at a lower level than necessary to maintain healthy funding levels. DrKW believes that prescribed regulatory requirements would be beneficial for credit quality in the longer term.

The government’s decision to introduce a Pension Protection Fund, which would be run by a statutory body, would also have a credit impact. Like the Pension Benefit Guaranty Corp. in the US, the PPF is designed to protect private sector defined benefit scheme members whose firms become insolvent with unfunded liabilities in their pension scheme.

Companies will be expected to pay into the fund made up of both a flat-rate and a “risk-based” premium. Although no exact details on levels of premiums have been announced, DrKW sees a strong chance that companies with a large funding shortfall already will have to pay significant premiums or will decide to make additional contributions into their pension plans to avoid doing so.

Ensuring solvent employers meet pension obligations in full if they want to close down a scheme is also regarded as negative, but to a lesser extent. Although legally possible at the moment for schemes to walk away from pension promises, it is very difficult given the impact on labour relations, says Dresdner, so there would probably be little difference if legislation was introduced.

The proposals by the UK government last week followed a lengthy consultation period on the pensions reform Green Paper released in December. The proposals are aimed at strengthening the position of scheme members, by making it more difficult for employers to walk away from their pension promises.