Government plans to ramp up scrutiny of ‘final salary’ pensions will cause an “accelerated end-game” for the schemes as they are forced to rapidly sell-off their riskier assets, a pensions chief has warned.
The Department for Work and Pension unveiled plans last month to ramp up scrutiny of ‘final salary’ – or defined benefit pension (DB) – schemes’ funding and investment strategies, and require them to submit plans to The Pensions Regulator amid concerns over mismanagement.
While the plans have been designed to better protect pension savers’ cash and “embed good practice”, experts have warned they will force pension schemes to sell-off non cash generative assets.
“The potential impact of these new regulations would be significant and dramatic,” Charles Cowling, chief actuary at asset manager Mercer said today.
“The draft proposals would force the sale of £500bn of return-seeking assets, the majority being required before 2040. This could see approximately £200bn of liabilities added to the balance sheets of employers with DB schemes over the next 10-15 years.”
Cowling added the present proposals come at a “high cost and with implications for both trustees and members”.
Ministers and technology leaders have been looking for ways to unlock pension cash and allow it to flow more freely into areas like early-stage private companies via venture capital and infrastructure projects. But the planned changes could scupper hope of diverting retirees’ money.
Cowling’s comments follow similar warnings last week from PwC’s global pensions head Raj Mody, who told City A.M. that the changes could be a “straitjacket” and “one size fits all for pension schemes.
Chair of the Pensions Regulator Sarah Smart separately warned in an interview with the Financial Times today that changes to the rules would mean schemes need to clear deficits faster than expected.
In his foreword to the consultation, pensions minister Guy Opperman insisted it is not DWP’s intention for schemes to undertake “inappropriate de-risking of their investment approaches”, however.
“The intention is to have better, and clearer, funding standards, but not to move away from the strengths of a flexible scheme specific approach,” he said.
“The Pensions Regulator told City A.M. last week the draft regulations embed the concepts of “concepts of supportable risk and liquidity into legislation” and will ensure schemes can take a “scheme specific” approach to their investment while ensuring member benefits are effectively protected.
“The principle that funding and investment risks taken along the journey to the funding and investment strategy should be supportable is already good practice and part of the integrated risk management framework set out in our existing code and guidance,” a spokesperson for the regulator said.