UK defined benefit (DB) sponsors face a £100bn bill if proposed funding rules go ahead, MPs are being warned, while the PLSA has called for differential treatment for open DB schemes.

According to new analysis from consultancy LCP, sponsoring employers of the largest UK DB schemes faced having to put £100bn (€109bn) into their pension schemes over the next decade, compared with perhaps £60-65bn under the current rules.

It said it would be sharing the analysis with lawmakers, criticising that no formal impact assessment had been published for MPs to consider. The Pension Schemes Bill, which LCP said gives legal powers to the Pensions Regulator (TPR) to take a tougher line with companies on pension scheme funding, is due for committee stage scrutiny in the House of Commons next week.

Focussing only on the UK’s biggest schemes – those with assets of £1bn or more or 10,000 members or more – the consultancy’s analysis is based on the new DB funding code principles proposed by TPR.

Anticipating a “likely acceleration of contributions under the new regime”, LCP questioned the additional value it would provide over the longer-term and said “our analysis shows it is simply going to lead to an increased likelihood of a problem which is already a concern for many sponsors: that of trapped surplus”.

“If businesses are forced to move tens of billions of pounds away from productive investment in the economy and instead have to lock the money up in their pension fund, there is a risk that this damages the long-term health not just of the companies concerned but of the UK economy as a whole,” said Steve Webb, partner at LCP and former pensions minister.

“MPs are being asked to debate these issues with almost no information about the scale of what is being proposed.

“If the government disagrees with these estimates, it should now come up with its own figures as to the additional billions that are going to be required so that MPs can make an informed choice.”

“Ultimately it comes down to a political question about the best use of capital in the current economic climate”

Jamie Harding, senior consultant at LCP

Jamie Harding, senior consultant at LCP, did the modelling and said that it was ultimately “a political question about the best use of capital in the current economic climate, and not one we can answer”.

“We just hope this is considered carefully by TPR when carrying out its impact assessment, and perhaps more importantly by the Department of Work and Pensions (DWP) when the new regulations are being drafted off the back of the Pension Schemes Bill, as it is these regulations that will give TPR powers to impose the new funding regime,” he said.

A DWP spokesperson said: “Employers and schemes who are already following good practice and planning for the long term should not need to change what they are doing. It is only right that those employers who have not been funding schemes sufficiently may have to pay more.”

The detail of the scheme funding measures are to be set out in secondary legislation, which will be subject to consultation to help balance affordability and member security. 

PLSA concerned about open scheme impact 

Ahead of the Public Bill Committee inquiry, the Pensions and Lifetime Savings Association (PLSA) said it had in its submission called for amendments to the Pension Schemes Bill pertaining to the provision of enhanced powers to TPR and clauses on the pension dashboards.

On DB funding, it said it was important that schemes that were expected to remain open to new members were treated differently from schemes that were not, and that this needed to be reflected in primary legislation.

“If they are not given more flexibility, we believe this will lead to substantial additional costs for employers and lead to the closure of some DB schemes,” the association said.

A key clause on DB funding in the Pension Schemes Bill, clause 123, was amended in the House of Lords to recognise differences between open and closed DB schemes, but the government wants to overturn this change.

The PLSA said it did not support the new government amendment aimed at doing so.