UK business warns of pensions retreat to MFR
UK - Business leaders have warned increasing regulatory pressure on the UK defined benefit pensions market could force a slide back towards the application of a Minimum Funding Requirement.
Richard Lambert, director-general of the UK's Confederation for Business and Industry (CBI) delivered a speech in London yesterday arguing senior executives feel the rising tide of regulatory requirements on their companies is moving away from "regulating schemes on their individual merits and weaknesses".
More specifically, he suggested the Pensions Regulator's increased focus on trustee decisions such as mortality risk and takeover deals, and their subsequent impact on pensions liabilities, is forcing firms to look at "a single national approach like the Minimum Funding Requirement - one that does not respect the unique position of the sponsor - all over again".
His comments were made as part of a wider criticism of UK pensions regulation and called for the system to move back towards a risk-based solution where trustees specify the position of the fund, rather than regulation which has seen the regulator "start specifying standards for the individual assumptions used by trustees, starting with mortality".
Calculations made by members of the CBI, supported by their investment consultants, suggest this proposed move would add an extra 10% to funding requirements, a spokesman for the CBI confirmed to IPE, on top of the £30bn the CBI notes is already being contributed by employer sponsors.
In 1996, corporate contributions to DB schemes reached £8bn a year for the first time, yet by 2006 were over £8.5bn a quarter.
Equally as important, schemes and employers are now seeking where possible to attain stability of costs and curb volatility of the scheme's asset valuations, added Lambert in his speech, as companies are now under pressure from their boards to improve the corporate balance sheets.
"Only this week, I was talking to the chief executive of a large listed company who told me that he was coming under increasing pressure from his independent directors to draw the line on pensions," said Lambert.
"The CEO told me he felt a moral obligation to long-term employees, and was very reluctant to make a change, continued Lambert, adding he was by that same executive "my position is getting harder to defend".
The pressure of balance sheet volatility is perhaps unsurprising as he also noted in his speech whereas deficits at the UK's top 350 listed companies in 2003 stood at £100bn, they had reversed to a £10bn surplus last year, and have swung back again to deliver a £10bn deficit.
Lambert warned fully open DB schemes are now "typically affordable only for the largest firms" and described the situation as being "a bit like setting up a hotel, and having the government's inspector come in and say ‘of course you can operate a hotel - but it has to be a Claridge's'".
As a result, he suggested any further swathe of "complex and expensive new regulation" will do "little to secure accrued benefits", adding they could be "the extra nail in the coffin of many DB schemes".
He was especially critical of proposals by the Accounting Standards Board (ASB) to require schemes to be funded to cover their worst possible risk scenario under the proposed ‘risk-free' rate and therefore welcomed the UK government's intervention on the matter.
A spokesman told IPE the CBI will also be responding to the International Accounting Standards Board consultation in due course, which is due to close its first wave of responses at the end of September.
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