New rules designed to protect company pension schemes could cost UK employers an extra £40bn over the next decade, according to new figures from LCP.
The consultancy firm has conducted an impact assessment on measures outlined in the Pension Schemes Bill and the new DB funding code.
It estimates that the sponsoring companies that sit behind the UK’s largest DB pensions will have to put £100bn into these schemes over the next 10 years. This compares to a cost of between £60bn and £65bn under current rules.
This assessment looks at schemes with assets of £1bn-plus or more than 10,000 members – a total of just under 300 schemes.
LCP points out that these costs could be a real drain on firms at a time when the UK is looking to recover from the current economic downturn.
It says these measures — due to be debated in Parliament next week — will force schemes to take less investment risk, so lowering returns, and at the same time reduce deficits over shorter timeframes.
The Pension Schemes Bill proposes to give new powers to The Pensions Regulator to take a tougher line with companies around scheme funding. This is in response to recent pensions scandals involving firms like Carillion and BHS.
However LCP says that the government has not done an impact statement on the proposed costs, which is why the consultants have now undertaken their own analysis.
LCP partner Jamie Harding says: “These contributions represent £100bn which is then not available for investment elsewhere in the UK economy”.
Harding highlights the fact that diverting funds into the pension scheme which could have been used to build the business could in some cases jeopardise the long-term prospects of the business. He said the next few months and years could prove critical for the financial solvency of many firms.
Former pensions minister and LCP partner Steve Webb adds: “Everyone wants to see people’s company pensions paid in full, but there is a real problem if government and regulators take too cautious an approach to the rules on pension scheme funding.
“If businesses are forced to move tens of billions of pounds away from productive investment in the economy and instead have to lock the money up in their pension fund, there is a risk that this damages the long-term health not just of the companies concerned but of the UK economy as a whole.
“MPs are being asked to debate these issues with almost no information about the scale of what is being proposed. If the government disagrees with these estimates, it should now come up with its own figures as to the additional billions that are going to be required so that MPs can make an informed choice”.
Commenting on these figures A DWP spokesperson says: “Employers and schemes who are already following good practice and planning for the long term should not need to change what they are doing. It is only right that those employers who have not been funding schemes sufficiently may have to pay more.”