UK - Forcing final schemes to be funded at buyout levels will place a huge cost burden on employers, a leading consultant warns.
Lane Clark & Peacock said the combination of proposals in the Pensions Bill – due for Royal assent in November – would inadvertently increase the burden of pension provision on companies.
LCP says the statutory funding objective – which replaces scheme-specific funding – coupled with the Pension Protection Fund would force employers to fund schemes on a buyout basis.
Under the proposed legislation, if trustees and the employer fail to agree on funding, the regulator will be called in to set the level.
But LCP claims the regulator – which will aim to limit calls on the PPF – will impose a level which protects the vast majority of benefits to prevent underfunding if the company collapses. Statutory funding applies to all benefits of the scheme and LCP claims that any involvement of the regulator would ultimately lead to “something close to buyout” which the employer must meet.
Partner Francis Fernandes said: “Although the PPF has been grabbing most of the headlines, when the various pieces of the Pensions Bill jigsaw are put together, the picture emerging may not be a pretty sight for many employers expecting contribution flexibility after 2005.
“If the new regulator gets really tough and demands something close to buyout funding, we are looking at schemes effectively being forced to self-insure themselves against PPF underfunding.”
Fernandes warned that bringing pension schemes up to a buyout basis overnight was impractical and, whatever the government’s intentions, would result in unwelcome upward pressure on employer contribution rates.
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The volume of insured buyouts from FTSE 100 defined benefit (DB) schemes could increase from £5bn to £300bn by 2029, according to Lane Clark & Peacock (LCP).