Pensions - Articles - New funding rules could increase DB pension deficits

The new pensions funding code could add a further £100bn to UK pension deficits and result in a doubling of pension contributions for a typical employer, according to new analysis from KPMG.

 As the industry waits for an updated Code of Practice on Funding Defined Benefits (the regulatory rule-book for pension funding valuations), pension trustees and their sponsors will be watching markets closely today as the end of March is the most common valuation date for defined benefit (DB) pension schemes.

 KPMG expects pension funding deficits to be broadly unchanged over the last year – at approximately £180bn across the UK as markets look relatively stable.

 The Government and the Pensions Regulator have talked about a ‘comply or explain’ regime for the new Code, designed to strengthen DB funding standards and reduce risk to members. In addition pension schemes will be tasked with setting a low risk Long-Term Funding Target and managing investment risks better. A first glimpse of the new Code is promised by summer this year, to be in force for 2020.

 Employers will need to be prepared for stronger funding standards and member protection, and in the absence of any other actions, KPMG estimate the impacts as:
 An average pension scheme could see its deficit rise by 50%, with an aggregate increase in deficits of £100bn across all UK schemes

 Deficit contributions for a typical scheme predicted to double, reflecting the intention for higher deficits to be met more rapidly than today’s typical 7 year plan

 Strong employers who currently rely heavily on investment returns could be forced into even greater increases in contributions

 Mike Smedley, Pensions Partner at KPMG said: “The Pensions Regulator (TPR) pledged in 2018 to become clearer, quicker and tougher and they have been living up to this mantra. The new Code will benefit members in the long term but could have a significant impact on pension schemes and employers.

 “The Pensions Regulator wants members to be better protected, and is increasingly telling schemes and employers how that should be achieved. But at the moment the details of the new Code are sketchy. The c.2,000 pension schemes which are due valuations this year will have the difficult job of planning for new rules which won’t be published before the summer.

 “Employers will question whether higher cash contributions are the most effective way of protecting the scheme – particularly if this comes at the expense of investment in the business. And Trustees may come under pressure to implement ever more prudent investment strategies. As a result we expect to see more creative solutions to bridge the gap and more contingent funding arrangements as a substitute for cash contributions.

 “For those schemes and employers that were already struggling to make ends meet, the new rules are likely to add further challenges. Some schemes may find themselves with irreparable pension deficits and will need to consider alternative strategies.”

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