The Pensions Regulator says reforms to pension rules will mean UK employers will have to clear pension deficits faster. The government stated last month that employers must pay any deficit in their “defined benefit” scheme as soon as possible.
The regulator will this year set out how this scheme should be applied to 5,500 pension plans, worth approximately £1.7 trillion in total. There are concerns that employers will struggle to pay the deficit owed to workers.
The reforms come after it has been announced that a new pension contribution scheme, Collected Defined Contribution (CDC), has been introduced in the UK as of August 1st to provide an alternative to the Defined Contribution (DC) and Defined Benefit (DB). This aims to provide greater returns for employees and simpler costs for employers. However, this has placed greater pressure on existing schemes.
The chair of the regulator, Sarah Smart, said the changes could lead to employers being asked to clear funding shortfalls quicker than expected. She said in an interview with the Financial Times:
“There will be some schemes for which there is a lengthy (deficit) recovery plan, where if we went in tomorrow and said, ‘where is your evidence for the length of your recovery plan’, I suspect that they would not be able to provide that.
The (new code) is to give greater clarity to schemes as to what ‘good’ looks like from our perspective.”
The proposals will also mean employers will receive less funding from their employees into the pensions schemes when they are nearing retirement age.
The majority of private sector pensions reliant on rates based on salary and length of service are largely extinct and not available to new members. Although, one million workers are in schemes such as the Universities Superannuation Scheme (USS) which is still taking on new members.
However, these new proposals have been met with opposition from some due to limiting the freedom for workers to invest in other assets, as well as damaging the USS and other schemes.
Smart responded to these concerns, as she claimed:
“What we have at the moment is effectively a bespoke system for every scheme.
For many schemes, many employers… life will not change under the [new] DB code.”
Smart also stated that the schemes would still allow workers flexibility in their investments and that the Pensions Regulator did not aim to wish to damage any existing schemes.
The regulator is also looking for a new chief executive to oversee this scheme due to Charles Counsell deciding to leave the position in March 2023. Automatic enrolment has meant a significant rise in workers joining the “defined contribution” pensions, causing a strain on the service. Smart added:
“One of the key questions we ask ourselves every day is how we apply our regulatory resources.
Realistically, with the economic situation, I have to think about the possibility we may suffer [budget cuts] and be asked to do more with less.
As a regulator we have a number of different statutory objectives, with one of them looking after the security of members’ benefits… and the other is to pay attention to the sustainable growth of the employer.
It has always been difficult as a regulator to balance the different objectives… and this will be something that is important for the new chief executive to understand.”
In addition to this, there is currently a dispute ongoing with the USS, as well as other providers, over pension cuts due to a 2020 valuation of the scheme. This valuation was during the pandemic, and so was argued to be totally undervalued and a 2021 valuation would be much more appropriate. The USS stated:
“It should be clear that the prudent conclusions and outcomes we have reached regarding the overall contribution rate required under the 2020 valuation do not rest on the market values of one day. It is incorrect and misleading to claim otherwise.
As trustee, we need to have sufficient confidence that the benefits being promised to members can be paid when due. We hope that the costs of these promises might come down in future, which could potentially allow benefits to improve – but we cannot today depend on it.”
