Proposed reforms to DB pensions risk growth and investment

The Department for Work and Pensions (DWP) recently consulted on regulations underpinning a new funding framework for Defined Benefit (DB) pensions.

What do employers think of the proposals?

The principles behind the revised funding regime are good. Previous business failures showed that there are still a minority of cases where the payment of final pensions is not being properly planned for. DWP is right to require DB pension schemes to think about the long-term and to have a funding and investment strategy in place.

As proposed however the regulations are not targeted towards just these outlier cases. Instead, they will act as a funding straitjacket across the DB pensions market that will drain funding from corporate sponsors and push schemes to divest of growth assets. Mercer estimate that £200bn of liabilities could be added to sponsor balance sheets because of the new regime over the next 10-15 years.

This money will have to come from somewhere, but at a time of such considerable economic pressure there are clearly other areas that should be taking precedence. CBI’s recent Employment Trends Survey found 75% of UK employers have faced labour shortages in the last 12 months, 46% of which have been unable to meet output demand as a result.

The CBI is particularly concerned that:

• Under the proposed regulations all DB schemes will be bound by a fixed target point at ‘maturity’ at which point they must have no dependence on their corporate sponsor and must have divested away from growth assets.
• A new requirement in law that trustees ensure pension deficits are closed ‘as soon as the sponsoring employer can reasonably afford’ will cause excessive caution in interpretation and will result in overfunding.
• Schemes may not have enough time in which to implement the drastic funding and investment changes required or even to completely understand the changes before the new regi