A new law currently going through parliament could add billions of pounds to companies' pension scheme liabilities, the UK's largest mutual life insurance and pensions company has warned.
A private member's bill prepared by Conservative MP Tim Loughton wants to allow opposite-sex couples to register for a civil partnership for the very first time. Currently, only same-sex couples are allowed a civil partnership in the UK while opposite-sex couples must choose marriage.
Yet analysis by Royal London and pension consultants Lane Clark & Peacock has shown this change could add billions to pension fund liabilities, although it adds that "the exact size of the effect is uncertain".
Read more: Cohabiting couples: Don’t get caught out
"Cohabiting couples currently miss out on a wide range of tax breaks, social security benefits and pension rights that married couples currently enjoy. Allowing such couples to register a civil partnership recognises changes in society, with cohabitation rates having doubled in the last twenty years," said Steve Webb, director of policy at Royal London.
There can be little doubt that legislation of this sort will be implemented sooner or later and the pensions industry will need to make sure that it has thought through the implications of these changes.
Loughton's bill received an unopposed second reading in the House of Commons last week. It will now be passed to a committee and the House of Lords to make amendments, before being considered again by the Commons.
Royal London noted that at the moment, many pension schemes only provide survivor’s benefits only to married couples or civil partners. Cohabiting survivors – even those who have been in a long-term relationship – may get little or nothing.
If these co-habiting couples were to choose civil partnerships, if they became available, pension funds could find themselves having to make many more payouts.
Where is the evidence?
A survey by Lane Clark & Peacock suggested that around 15 per cent of the liabilities of company pension schemes are in respect of payments to future widows and widowers of existing pension scheme members.
As the total liability of private sector defined benefit (DB) schemes is approximately £2 trillion, this would suggest roughly £300bn is in respect of future widows and widowers – currently only of marriages and same-sex civil partnerships.
Yet this could increase as opposite-sex couples can register for a civil partnership. According to Royal London, there are roughly 12m married couples in the UK and a little over 3m cohabiting couples. An extreme assumption would be that the bill for future cohabiting partners, were they all to register for civil partnerships, could add up to a quarter of the current £300 billion cost.
Of course the true cost is likely to be much less than this. Some cohabiting couples will not choose to register for a civil partnership, others will get married anyway, and the older age structure of DB pension schemes means there will be fewer co-habiting couples among them than in the population as a whole.
Also rights for cohabiting partners might only start from the date the new legislation is introduced, and some schemes already make provision for cohabiting partners to receive survivor’s benefits.
But even if the new laws added just one per cent of current liabilities, rather than 25 per cent, this would still be £3bn.