Pensions funding code changes could add £100bn to deficits

The planned 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, KPMG is warning

result in a doubling of pension contributions for a typical employer, KPMG is warning.

An updated code of practice on funding defined benefits (DB), which is the regulatory rule-book for pension funding valuations, is intended to strengthen DB funding standards and reduce risk to members and is viewed as likely to usher in a ‘comply or explain’ regime.

In addition, pension schemes will be tasked with setting a low risk long-term funding target and managing investment risks better. The first draft of the code is set to be available this summer and will 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’s analysis estimates an average pension scheme could see its deficit rise by 50%, with an aggregate increase in deficits of £100bn across all UK schemes.

In addition, deficit contributions for a typical scheme are predicted to double, reflecting the intention for higher deficits to be met more rapidly than the current typical seven 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 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 ode 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 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.’

Smedley cautioned that some schemes and employers that were already struggling to make ends meet may find themselves with irreparable pension deficits and will need to consider alternative strategies.

Meanwhile, pension trustees and their sponsors will be watching markets closely as the end of March is the most common valuation date for 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.

Report by Pat Sweet

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