Will new rules kill or cure company pensions?

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The Pensions Regulator has issued an annual statement, making it clear to the trustees of company pension schemes what their priorities should be. This year there has been some good news and some bad.

And there are some who say the bad news could be the final nail in the coffin of generous final salary pension schemes.
The announcement has emerged in a tough environment for the schemes. Quantitative easing means that one of the variables that feeds into calculating the black hole in many pension schemes has changed, which means schemes need to put in 50% more money - regardless of how their investments have been doing. Dr Ros Altmann, Director-General of Saga explains: "QE has put UK defined benefit pensions in an even more difficult position than they were before."

The good news

The Pension Regulator has been roundly applauded for introducing some new flexibility to company pension schemes. It said: "Where the employer's covenant has weakened and it cannot afford to continue contributions at previously agreed levels, or is unable to pay more in respect of a larger deficit, trustees may need to agree to a longer recovery plan." In other words, if a company has a massive hole in its pension scheme and it is struggling to afford top-ups, it can have a while longer.

It added: "Employers that are struggling have greater breathing space to fill deficits over a longer period. However, we will draw a distinction between this group and those cases where schemes are substantially underfunded and employers are able to afford higher contributions. In such cases we will expect pension trustees to be taking steps to put their scheme on a more stable footing."

Martin Bamford, managing director of advisers Informed Choice, says: "Final salary pensions are already an endangered species in the private sector. It is good to see this pragmatic approach from The Pensions Regulator at this time of extraordinary market conditions for pension scheme trustees."

The bad news

The Regulator has, however, made it clear that there can be no shirking of payments to take advantage of these rules. It has also emphasised that topping up pension scheme shortfalls should come higher on the priorities list than things like paying dividends.

It said: "Where cash is being used within the business at the expense of what otherwise would have been affordable pension contributions, it is important that it is being used to improve the employer's covenant – rather than benefits accruing disproportionately to other stakeholders."

And it specifically highlighted dividends as not being a worthy alternative: "Most employers can afford appropriate dividend payments without prejudice to the funding of the pension scheme. However, if there is substantial risk to the likelihood of the pension scheme delivering the benefit entitlements promised within it, then dividend payments need to be re-assessed in light of the obligations to the pension scheme, and other creditors."

Altmann argues: "The Regulator is right to sound tough and warn shareholders that the pension fund has precedence over their interests in the company, and also to suggest that dividend payments should not be prioritised over pension contributions."

However, it makes final salary schemes even less attractive for bosses. If they have to prioritise payments over rewarding investors there could be concerns that investors will vote with their feet, and the business could struggle to raise cash. Meanwhile having to prioritise it over executives and their bonuses is going to make those executives think even longer and harder about whether they really want to keep their final salary scheme.
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