Both employer and labor groups are pressing the U.K. government to revamp its proposed minimum funding rules for pension plans and adopt a central discontinuance fund to back up plans of failed companies.
But a Labour-sponsored amendment to the U.K. pensions bill is expected to make little headway in the debate now under way in the House of Commons.
"We do acknowledge it's late in the day, and we don't want to hold up the bill," said Susan Anderson, head of pensions for the Confederation of British Industry, which has been advocating the switch.
Ms. Anderson said the CBI would like the government to switch valuation of plan liabilities to an ongoing basis from a termination basis, and to include a clause in the bill that would allow for creation of a central fund if further study showed it would offer a preferable option. She did add, however, the current funding proposals are adequate.
There has been a growing chorus of complaints about the proposed minimum funding requirements. Despite the government's easing of its original proposals, many employers still worry they will be forced to inject cash into funds during periods when markets are depressed, and that pension funds will adopt more conservative investment strategies to avoid volatility. Such strategies often would involve a greater emphasis on bond investments, which historically perform less well then equities.
The government estimates the cost of adopting its funding rules will be between (pounds) 300 million and (pounds) 400 million a year over 12 years, as poorly funded plans are strengthened and between 5 billion and 12 billion are shifted into gilts from equities.
In contrast, the CBI anticipates costs of 875 million a year over 10 years, but its figure was based on a survey conducted prior to a December easing of the government's proposed funding rules.
In response, the Labour Party amendment that is backed by the Trades Union Congress would shift funding to a minimum contribution basis supported by a central discontinuance fund.
Plans of bankrupt employers could be placed into the fund. While the discontinuance fund would not be obligated to make up any shortfalls in funding, Donald Dewar, Labour's shadow minister for Social Security, argued there was a greater chance any plan funding deficits could be erased because the fund would be permitted to invest in equities.
Otherwise, the plans probably would have to purchase annuities regardless of market conditions. The weak market for deferred annuities has led to benefit cutbacks of up to 40% for active members at the Swan Hunter Shipbuilding & Engineering Group Ltd. pension plan when it was terminated last year, although the plan was fully funded on an actuarial basis.
CBI officials and other pension experts say the concept of the discontinuance fund should be explored, although they dislike certain provisions in the Labour proposal, particularly those restricting employer use of surplus assets and requiring contributions even when the plan is fully funded.
"As a concept, it has a lot of merit," said Richard Malone, European policy director for Sedgwick Noble Lowndes Ltd., Croydon.
But government officials are wary the government might be asked to guarantee the fund in case it ran into trouble, or that employers would be taxed to support it.
William Hague, government minister for Social Security, told a House of Commons committee that a government survey showed 86% of 500 employers were fully funded, while 96% were at least 90% funded.
Under the minimum funding proposal, an employer would have to make a cash injection within a year if plan assets dipped below 90% of liabilities and would have five years to get to full funding if assets fell between 90% and 100% of liabilities.
"The vast majority of employers sponsoring final salary schemes will be unaffected," Mr. Hague said.
Mr. Hague also said a shift to a minimum contribution basis might not provide adequate protection for participants, unless a narrow range of actuarial assumptions were prescribed.
CBI officials also would like to shift the funding standard to an ongoing basis, which would retain smoothing factors for equities, but government officials believe that would disrupt other portions of the bill.
Meanwhile, pension experts continue to debate the rules' effect on investment policy.
If trustees choose to match investment objectives with the minimum funding requirement, that could reduce U.K. pension fund returns by about one percentage point a year, warned Paul Haines, investment director at Sedgwick Noble Lowndes.
That could drive up U.K. pension costs by as much as 20% a year, Mr. Haines told the National Association of Pension Funds' annual meeting in Birmingham.
While most companies will not be affected by the rules, finance directors will worry about being forced to make cash contributions to their funds if asset values plunge below 90% of plan liabilities, he said.
Switching a fund's equity/debt mix to 60/40 from 80/20 would cause the fund to give up roughly one percentage point a year in returns, measured over various long-term periods from 1918 through 1993, Mr. Haines said.
But Penny Webster, a partner in the Epsom office of Bacon & Woodrow, said she doubted most plans would follow a fully matched strategy because they will have enough of a funding cushion to give them greater investment freedom.
Ms. Webster said "the vast majority of schemes will not follow a fully matched strategy, principally because they have a sufficient solvency cushion to allow them to depart from it."
Experts also fear matching strategies will cause U.K. funds to avoid overseas securities and real estate. Ms. Webster said plans that are unmatched "are likely to want to continue to invest in property and overseas equities and bonds for exactly the same reasons as they have in the past: higher returns and spreading of risk."