One of the many economic effects of the coronavirus pandemic will be sharp increases in the funding deficits of UK defined benefit pension schemes, partly due to the value of assets but in particular due to the fall in interest rates and gilt yields, which has also greatly increased the value placed on schemes’ liabilities. This will affect forthcoming actuarial valuations for some time to come and the increased funding costs for many employers is likely to be a drag on their recovery and therefore on business investment and economic growth.
There are, of course, many similarities to the impact of the 2008 financial crisis, though overall the current crisis is more severe due to the widespread effect on employers’ businesses, which is prompting immediate moves by many companies to suspend pension contributions among other measures. The financial crisis had a long after-effect on pension scheme funding, with valuations being adversely affected by low interest rates for years after the event. Companies and trustees were able to make use of the flexibilities in the scheme funding regime to manage this, including by agreeing longer deficit recovery plans. Nonetheless the adverse effects on economic growth attracted political attention, with various proposals being considered to change the pension scheme funding regime. One proposal that did become law was a change to the statutory objectives of the Pensions Regulator (TPR) so that, as well as protecting pension scheme benefits, it was given the goal of minimising adverse impact on the sustainable growth of an employer.
The promise of a balance being struck between enabling business growth and the protection of members’ benefits was cut short by the political impact of the BHS and Carillion insolvencies. For several years now, the regulatory environment has been risk-averse and focused on maximising scheme funding. There has been little political attention given to the potential adverse effect on the businesses that have to support pension schemes. The post-BHS swing of the regulatory pendulum is still bringing about major changes to the pension protection and funding regime, including the introduction of new, vaguely defined criminal sanctions in the Pension Schemes Bill and a comprehensive overhaul of the regulatory Code for scheme funding by TPR. This context of heightened legal risks and regulatory scrutiny is likely to make it more challenging to deal with the impact of larger deficits, unless there is a shift in approach. Partly it is question of whether TPR is able to respond with appropriate flexibility and understanding of the pressures on businesses. As discussed here its initial guidance on suspending contributions, which was issued quickly, was largely helpful and pragmatic. But it will need to maintain this approach during the years of recovery from the crisis, and as we discuss in our latest briefing, reconcile it with the new funding regulatory framework it is working on implementing.
Not all of the responsibility lies on TPR, which has to work within its governing legal regime. The Government and Parliament should think carefully about the effect of some of their proposed changes to pensions law in light of the crisis. In particular, they should be asking whether now is an appropriate time to introduce new, ill-defined criminal penalties of uncertain scope that would apply to any person deemed to have placed accrued pension scheme benefits at risk.