UK: OCCUPATIONAL HAZARDS. - The Pensions Bill solvency standard clause is causing alarm.

Last Updated: 31 Aug 2010

The Pensions Bill solvency standard clause is causing alarm.

The Pensions Bill, published shortly before Christmas, looks set for a rough passage through Parliament before it reaches the statute book - if it ever does, in anything like its present form. By no means all its provisions are controversial. But some of the clauses relating specifically to occupational schemes are causing consternation in the pensions industry and in companies which operate such schemes.

Not all employers are overjoyed at the prospect of having to admit elected representatives of scheme members to the boards of trustees. Indexation of pensions can only increase costs. But most controversial is the requirement for a minimum solvency standard (MSS) to ensure that a scheme is always in a position to meet claims that might be made upon it. Schemes failing to satisfy this standard will have to make up the shortfall. The total cost to employers is expected to be upwards of £300 million over a period of years.

The MSS is intended to protect scheme members without placing unreasonable burdens on properly funded schemes. Its critics claim that the problems it will pose will far outweigh the benefits. Ron Thom, pensions partner at the City law firm Allison & Humphreys, points out that the MSS will oblige companies to increase contributions (possibly at very short notice) if the stock market performs badly, regardless of how the companies themselves are doing. 'This will reduce the amount of control a company has over cash flow, the lifeblood of any commercial enterprise.' Trevor Crowther of KMPG Peat Marwick sees funds moving away from comparatively volatile equities in search of safer options such as gilts. This would go a long way to limit risk, but would substantially reduce returns. 'I'd rather see a long-term test that puts controls in place to prevent problems occurring that are based on sensible assumptions,' says Crowther. Barry Sutton, a director of BHK Financial Management, foresees that companies could virtually be held hostage by the schemes they run for employees, even to the point where banks might consider the firms themselves unacceptably poor risks. 'It's bizarre,' thinks Sutton. 'People are not in the widget business to pay pension schemes. They're in it to make widgets - and profits.' The Goode Committee, upon whose findings the proposals are based, obviously saw no justification for such alarm. And they are not alone. 'A lot of firms seem unconcerned,' observes David White of Prudential Corporation. In any case, he adds, 'the solvency standard is unlikely to affect most schemes because it's relatively weak'. On the other hand White is inclined to doubt whether the package of measures affecting occupational pension schemes really address the problem they are intended to solve: 'The ultimate question is, had these regulations been in place, could the Maxwell scandal have taken place? The answer is Yes, it probably could.' If the effects of the Pensions Bill are as drastic as some fear, the combination of escalating cost and increased risk could kill off occupational schemes altogether. No company will continue supporting a fund that threatens to jeopardise its core business.

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