New funding rules for U.K. defined benefit plans being developed by The Pensions Regulator could potentially mean plan sponsors will need to make up to £34 billion ($42 billion) in additional contributions, according to an analysis published Monday by investment consultant Lane Clark & Peacock.
The forthcoming funding rules call for pension funds to be funded on a "low dependency" basis once they are "significantly mature," without further specifics. It also calls on trustees to expect sponsors to pay down any deficits "as soon as reasonably affordable."
The £34 billion figure is based on one TPR scenario in which pension funds below a certain level added funding to meet the threshold, and those funded above it did not reduce their funding levels. While that might be an extreme estimate of the potential cost and "not one expected in practice, there can be little doubt that for some employers these new rules will represent a significant new or additional burden," the LCP analysis said.
LCP also noted that the TPR estimates were based on market conditions as of March 2021, and funding levels have generally improved since then. Still, "it doesn't mean the impacts will necessarily be lower," said Michelle Wright, partner and head of pensions strategy at LCP, in an email. "There are other factors at play due to how the regulations work," including when pension funds need to be considered low-risk, she said.
"Even if the net change in position is much lower than the £34 billion figure, this will be made up of winners and losers. For the losers, the impact will still be a large hit to their finances," Ms. Wright said.
Once the new funding rules are finalized, potentially later this year, the increased funding demand will apply during a pension fund's regular valuation.