UK employers expect the direct costs of running a defined benefit (DB) scheme to increase and that more of their time and resources will be spent completing administrative tasks to comply with new DB regulation, a survey has found.

The results of the CBI/Mercer Pensions Survey shared today at the Pensions and Lifetime Savings Association (PLSA) Annual Conference 2021 show that plan sponsors with a DB scheme (25%) are more likely than businesses with only a defined contribution (DC) scheme (14%) to cite the cost of administering automatic enrolment as a challenge.

The survey – published in the report ‘Commitment through crisis: how schemes responded to COVID-19 and their expectations for the future’ – looked at what 186 senior executives and 164 pension scheme managers thought about the future of DC pensions, how DB barriers could be eased and what is needed by schemes to succeed on their ESG journey.

“Regulatory pressures are causing company resource to be diverted away from the next generation of retirement savers, exacerbating an intergenerational divide,” Tess Page, partner and UK wealth trustee leader at Mercer, told delegates at the PLSA conference.

“An ever-increasing list of regulation means more and more resource is being diverted towards the funding and management of DB schemes at the expense of DC schemes that are meant to be funding the younger generation’s retirement,” she added.

The survey also found that one in three (33%) survey participants expect cash contributions to increase due to the introduction of the new DB Funding Code of Practice, which is expected to be subject to further consultation in 2021.

Tess Page

Tess Page, Mercer

Despite their concerns, over three quarters (76%) of pension managers who think the new DB Funding Code of Practice will lead to an increase in cash contributions have not taken any actions to pursue alternatives to cash, such as enhanced security.

“Despite understandable cash flow pressures, businesses with a DB scheme remain committed to securing these benefits,” Page said.

She said that businesses need more support from the government to manage competing costs as this would allow them to invest in their business while also maintaining their commitment to their DB schemes.

According to the survey, almost two-thirds (65%) of firms with DB schemes think the government should prioritise supporting DB employers to grow their business whilst meeting pension schemes costs during the next two years.

Employers also have concerns about existing obligations: almost a quarter (24%) of businesses with a DB scheme also said that managing their legacy DB (and/or DC scheme) alongside their automatic enrolment scheme was a challenge.

Costs of ESG requirements

The survey also found that the cost of complying with new ESG requirements also concerns businesses, especially DB schemes.

A net balance of businesses with both DB schemes (81%) and DC schemes (53%) expect Task Force on Climate-Related Financial Disclosures (TCFD)-aligned reporting to pose one or more challenges.

Businesses with DB schemes are more concerned than businesses with DC schemes about the resource implications new TCFD-aligned reporting and disclosures will bring, the survey stated.

Research data showed that one in four (24%) businesses with a DC scheme believe that climate-related risk reporting will create an additional administrative cost. This jumps to almost three in five (57%) for businesses with DB schemes.

These costs are likely to be significant, with both businesses with a DC scheme (41%) and businesses with a DB scheme (62%) thinking that the cost of publishing compliant TCFD-aligned disclosures will be greater than the government’s estimate of £15,000.

The report highlighted that UK businesses continue to face challenges when gathering ESG data and when formulating metrics.

Whilst the TCFD framework provides a standardised reporting template, without clear, available data on what constitutes green investments, firms do not have criteria to compare against, it said.

“Reporting and disclosures will only have their desired impact if trustees and sponsors have access to common sustainability standards and metrics to make assessments of green credentials,” the report stated.

The lack of standardisation leaves businesses wanting to produce high quality reports with little choice but to seek paid-for advice, which far exceeds the expense estimated by the UK’s Department for Work and Pensions.

Survey methodology

  • Conducted between 7 June and 25 June 2021
  • Completed by 186 senior executives and 164 individuals responsible for their businesses’ pension schemes
  • 75% of participants have a DC scheme, 24% of which have an aggregate value of more than £51m
  • 31% of participants have a DB scheme, 41% of which have an aggregate value of over £1bn

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