Far from saving £80m annually the government's Pension Bill could end up costing an additional £400m annually, suggests research by consultant Watson Wyatt.
The new figure is based on the assessment of risk associated with the large unknown factors introduced by the Bill, such as the Pensions Protection Fund, and estimates of additional pension saving that are deemed over-optimistic.
”The DWP is looking at its own Bill through rose-tinted spectacles and has failed to respond to feedback to its initial analysis of the costs of the Pensions Bill,” Watson Wyatt (WW) states.
Examples from other countries whith guarantees similar to those held out by the PPF indicate that costs are always greater than expected, in part because costs associated with under-funded schemes in declining industries are shifted to better performing employers.
It would be enough for a single major employer to go bust with an under-funded scheme for the costs to rise significantly for remaining employers, WW says.
WW believes the long-term cost of the PPF will be well above the £300m figure estimated by the DWP so far for the first year of the new regime
That sum would be insufficient to provide the benefits promised, but cutting back on benefits would be impossible because of “political pressure”, WW says.
Instead, it sees the levy in the first year possibly approaching £500m, not far off the levy ceiling of £600m.
On the point of additional savings, WW points out the industry is still waiting on the DWP to publish details on the new Scheme Specific Funding Requirement (SSFR), which, again, is more likely to increase rather than decrease costs for employers.
The DWP believes £370m can be saved by allowing schemes to cut the guaranteed rate of pension increases related to future service from 5% to 2.5%. Another £100m in savings could come from the switch from the MFR to the SSFR. Both assumptions are wrong, WW says.
”We believe the DWP estimate of the number of schemes that will take advantage of the reduction in required levels is too high, and it has failed to make adequate allowance for he reduction in the number of members of defined benefit schemes, as a result of the closure of schemes.”
”A more realistic allowance for the saving to schemes would be £185m, which is half the level assumed by the DWP. The savings from the SSFR depend on regulations that have yet to be published, even in draft form. Until these have been seen it would seem unwise to assume than any saving would result.”
“Indeed, there is a material risk that contributions to schemes will rise following the introduction of a SSFR, with pressure on employers to fund their schemes more cautiously than hitherto.”IFAonline
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