Proposals to include mortality assumptions in funding plans could be "another nail in the coffin" for defined benefit (DB) schemes, warns Occupational Pensions Trusts (OPT).
OPT, a pension scheme buyout trust launched in September last year, says proposals from The Pensions Regulator revealed last month could raise costs too high for employers.
The regulator proposes schemes will face increased scrutiny if their mortality assumptions appear weaker than the long cohort assumption, if their assumptions include an improvement rate tending towards zero and they have no form of underpin.
Ben Shaw, development director of OPT, says: “The Pensions Regulator hopes the changes will increase employers’ contributions into schemes and reduce calls on the PPF. But I see this as just another nail in the DB schemes’ coffin.
“Every time an announcement like this is made some companies call time on their DB schemes and close them down to new members. Others are actually forced to start talking to the PPF because they realise they will be unable to meet the increased funding demands.”
OPT also says the Accounting Standard Board’s (ASB) discussion paper on changing IAS19, the international accounting standard, towards a buyout-based metric will probably make companies more aware of their pension liabilities by using overly-cautious calculations.
Shaw says: “One can understand why they have come up with this proposal – their responsibility does not lie with DB schemes, they are responsible for providing accurate financial information to investors looking at businesses.
“In this context, the buyout cost is the maximum current market value of offloading a pension scheme and is therefore the most prudent measure to be included in a company’s accounts. Unfortunately they miss the fact that there are other solutions out there, like OPT, which allow companies to divest themselves of a pension scheme at a price considerably lower than buyout.”
A statement from the Pensions Regulator says: “We accept that additional costs are unwelcome to employers and we recognise that the increased costs can be met over the period of a recovery plan which can be tailored to an employer's ability to pay. However, the evidence all points to longer life expectancies and hence to increased cost."
The Pension Regulator’s consultation ends on 12 May and the proposals will apply to recovery plans based on valuations with effective dates from March 2007.
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