A government crackdown on pension funding gaps threatens to strangle Britain’s economic recovery by forcing companies to plough £100bn into plugging deficits over the next decade, experts have warned.
The proposed laws follow steps by the Pensions Regulator that could force companies to move more quickly to fill holes in their pension schemes after company failures at outsourcer Carillion and retailer BHS sparked demands for reform.
However, some experts fear that steps to beef up the regulator’s enforcement powers and to push financially secure companies to pay down their deficits more quickly would be counterproductive. Such a push could leave firms with less money to invest in growing their businesses as the economy recovers from the pandemic.
Nearly two thirds of listed companies with defined benefit schemes have issued profit warnings this year, according to consultant EY.
Sir Steve Webb, a former pensions minister and now a partner at consultancy Lane Clark & Peacock (LCP), said: “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.”
Analysis by LCP of almost 300 pension funds with assets of at least £1bn or with more than 10,000 members found that employers could have to stump up £100bn over the next decade. Under the current rules, the companies would be required to pay an estimated £60bn to £65bn, the consultancy found.
Baroness Ros Altmann, another former pensions minister, called on the Government to reconsider: “In the midst of a national economic crisis, forcing firms to increase pension funding sharply, instead of using their resources to boost their business, clearly increases the risk of employer failure.”
A decade of low interest rates has driven up the cost of providing defined benefit pensions, forcing employers to invest more money up front to be able to pay pensions when they fall due.
The Bank of England is considering whether to cut interest rates below zero for the first time, which would punch a further hole in pension schemes. A 0.25pc cut could add £25bn to the £166bn aggregate shortfall in the 5,422 remaining defined benefit schemes at the end of September.
Such schemes pay retired workers a guaranteed percentage of their salary and force employers to accept the risk that investments may fall in value leaving them with a bigger hole to plug.
Most employers no longer offer defined benefit pensions because of the cost and encourage employees to invest in their own personal pension pot instead.
MPs are due to resume a debate on the Pension Schemes Bill next week but no formal impact assessment has been published to show the potential effect of the new rules.
A spokesman for the Department for Work and Pensions said: “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.”
A spokesman for TPR said: “It is too early to tell what overall impact the proposed approach to the [funding code] will have on employer contributions and scheme deficits.
“We proposed a twin track approach to pension scheme valuation. However, neither option would force employers to put more money into a scheme than they can reasonably afford to pay.”