LONDON — Britain's regulators have delivered what is potentially a one-two punch to U.K. corporate defined benefit pension funds, according to consultants, plan sponsors and other experts.
Within a month, two proposals that affect the way companies recognize liabilities for future pension benefits have been introduced.
If adopted the proposals could drive some U.K. pension executives to shut their defined benefit plans to new members — or close them altogether — at an even quicker pace. Others may be forced to inject more cash to better match assets with pension liabilities, therefore leaving companies with fewer resources to build their businesses. As a result, more companies may consider the buyout option, whereby a portion or all of a fund is acquired, usually by an insurance-based bulk annuity provider, pension experts said.
The Pensions Regulator, the London-based government agency that oversees pension funds, on Feb. 18 released a proposal that aims to set a more consistent standard in longevity assumptions used by pension funds in calculating liabilities for accounting purposes. Earlier, on Jan. 31, the U.K. Accounting Standards Board issued a discussion paper to change the discount rate that pension funds should use to recognize liabilities. If adopted, the changes together could add 20% to 25% to the pension liabilities of the average pension fund, several consultants estimated.
“Companies are already recognizing the high cost of providing (defined benefit) pensions,” said John Ralfe, an independent consultant and the former head of corporate finance at the Boots PLC (now Alliance Boots PLC) who spearheaded the move into liability-driven investing in 2000 by that company's £3.5 billion ($6.9 billion) pension fund.
The new proposals will force companies to further recognize the risk of investing in equities and the risk of longevity, Mr. Ralfe added. “Together, you could have an explosive cocktail in the making.”