Mercer is the latest consultancy firm to warn that proposed government regulations will accelerate the demise of DB schemes – potentially causing problems for sponsors, trustees and DC schemes.
In a strongly worded warning Mercer’s chief actuary Charles Cowling says the potential impact of these new regulations would be ‘significant and dramatic’.
Mercer says these draft proposals would force the sale of £500 billion of return-seeking assets, the majority being required before 2040. This could see approximately £200bn of liabilities added to the balance sheets of employers with DB schemes over the next 10-15 years.
He questions whether this accelerated demand for buy-outs could be met by current market participants.
Mercer adds that these new rules might force some employers to divert scarce assets away from DC schemes, which cover the majority of those now in the workforce.
These comments come after LCP warned that these regulations could cause issues for sponsors, that could impact jobs and push some sponsors into insolvency.
The warnings concern draft rules for the Occupational Pension Schemes (Funding and Investment Strategy and Amendment) Regulations 2023, recently released by the Department of Work Pensions.
If implemented as drafted Mercer says these rules would require almost all DB pension schemes in the UK to divest entirely of return-seeking assets — the majority by 2040.
Cowling says: “The regulations would significantly accelerate the buy-out of DB pension scheme liabilities, such that we might expect to see the demand for the settlement of up to £200bn of pension scheme liabilities each year for the next 15 years.
“What isn’t clear yet, is whether this accelerated demand could be met by current market participants.”
Cowling adds that while Mercer welcomes moves to a safer, more secure pension environment, it has also warned the present proposals come at a high cost and with implications for both trustees and members.
“The current proposals focus on DB pensions, rather than defined contribution schemes (DC) that millions of people currently working will rely upon in future.
“While we welcome efforts to encourage a safe and secure environment for member benefits, this should not come at cost of diverting scarce employer resources from the DC schemes that will deliver people’s pensions in the future.
“If adopted, these draft government regulations will significantly change the pensions landscape and make the operation of DB schemes more challenging, particularly smaller schemes.
“Trustees work in the interest of securing members’ benefits and must be given the flexibility to take steps necessary to deliver on this responsibility in a proportionate and appropriate way.”
The DWP said these regulations should not mean schemes have to undertake inappropriate derisking.
In the forward to this consultation, the DWP stated: “Those schemes that are maturing will be required to manage their risks carefully, taking proper account of the extent to which those risks remain supportable as they move towards run-off, or securing members’ benefits.
“But these draft regulations also take account of open schemes which are not maturing and have adequate ongoing sponsor support. It is not our intention that such schemes should have to undertake inappropriate de-risking of their investment approaches. The intention is to have better, and clearer, funding standards, but not to move away from the strengths of a flexible scheme specific approach.”