UK – Actuarial consulting giant Watson Wyatt has voiced concerns that the Pension Regulator’s proposals on how it intends operating under the new funding regime for DB schemes could leave more than 2,000 pension schemes facing funding difficulty and uncertainty.
The regulators proposals were published today as a consultation paper.
“This scheme-specific approach is better than the Minimum Fund Requirement,” said Watson Wyatt senior consultant Nigel Brodie. “On the other hand, the Regulator expects the new scheme-funding regime to have a significant impact on behaviour. This translates into higher contributions from employers.”
He stated that the regulator was likely to set full funding targets against the IAS 19 accounting standard and Pension Protection Fund benefits.
“Based on the regulator’s own estimates, this will require £130bn additional contributions into company pension schemes, spread over no more than 10 years,” he added. “The regulator suggests that ‘many finance directors already view FRS17 as their funding commitment’.”
As a result, Watson Wyatt fears that a significant number of companies would not be able to meet funding targets if they were set too high.
“The regulator’s own figures show that more than a third of companies with final salary schemes – perhaps more than 2000 in total – would have problems in meeting a funding target of covering their accounting liability within 10 years,” said a Watson Wyatt press release.
While these companies might require individual attention from the regulator, others that meet targets may feel their contributions are “unnecessarily high” due to the regulator’s risk-averse stance.
“The regulator is going to have an enormous potential workload which will no doubt lead to delay and greater uncertainty,” added Brodie.
The Pensions Regulator told IPE that it was looking into what could be done regarding schemes unable to pay off their FRS17 deficits within 10 years.
“We will look into perhaps instituting a longer recovery period that is scheme-specific,” said a spokesperson for the regulator.
Watson Wyatt also raised concerns about the prominence given to ‘buy-out’ cost – a measure of scheme funding largely unknown for most schemes, and based on the price an insurer would charge to guarantee the provision of benefits.
“Continued use of the term ‘buy out’ by legislators and the regulators gives trustees and the members an unrealistic notion of the security of pensions,” said Brodie. “The government has decided to improve the security of pensions and tens of billions of pounds will flow into pension schemes as a result.
“But the truth is that nothing in life – including a pension – is ever completely secure.”