Freedom of choice ‘could cost companies £25bn’, consultant warns
UK companies could face a £25bn (€28bn) accounting bill because of the impact of pension freedoms, consultancy firm Xafinity Punter Southall has claimed.
Businesses are failing to account for the flood of people opting to transfer out of defined benefit (DB) schemes and the knock-on effect these moves could have on a typical pension scheme’s liabilities, the pensions consultancy said in its report, Accounting for Pensions.
Wayne Segers, principal at Xafinity Punter Southall, said: “We are starting to see older pension scheme members that are close to retirement leaving their DB pension schemes to access the new pension freedoms.
“Transfer values remain high and this is an attractive proposition for members, but these values are typically worth more than the accounting cost.
“For a £500m scheme even a small proportion of members leaving could add £7m to their accounting liabilities.”
UK pension scheme members have had access to more flexibilities regarding their pension income since reforms introduced by former chancellor George Osborne were implemented in 2015.
Some campaigners in the Netherlands have called for similar measures in the debate about the country’s proposed new pension system.
Last year, £34bn was transferred out of occupational schemes in the UK – a leap of £21bn on the previous year, according to the Office for National Statistics.
Life expectancy rates are also changing, with the increase in the number of people living longer slowing in recent years, according to data from the Continuous Mortality Investigation (CMI) unit of the Institute and Faculty of Actuaries.
This might act to soften the cost implications and reduce schemes’ liabilities, Seger added.
“We may no longer be expected to live as long as we had hoped and the CMI has given companies a method to refine assumptions on life expectancy,” he said. “This may offset the cost of member options.”
Warren Singer, UK head of pension accounting at Mercer, said accounting and transfer assumptions were specific to each pension plan. Therefore “accounting cost implications of pension freedoms can vary considerably between companies”, he added.
“This means that transfer value experience may be neutral to the accounting cost [and] it may lead to cost savings or in some cases it could lead to additional costs,” he said.
The problem stems from when the pension transfer value is greater than the accounting liability for the pension fund that was extinguished when the individual left, said David Robbins, director at Willis Towers Watson.
“The increase in transfer activity is something companies will want to look at how in terms of how that affects the whole range of pension management. But the accounting number will not always be the dominant concern.”