DB savers face contribution hike as deficits increase

DB savers face contribution hike as deficits increase

Savers with a defined benefit pension scheme in deficit could find themselves having to pay more towards it to plug the gap, according to an analysis by The Pensions Regulator.

The regulator’s Annual Defined Benefit Funding Statement said despite all major asset classes performing well and schemes paying £44bn in deficit repair contributions in the past three years, many with 2015 valuations will have larger funding deficits because of falling interest rates and schemes not being fully hedged against this.

Stephen Soper, executive director for DB at The Pensions Regulator, said schemes that can take on additional risks can address higher deficits with changes to their funding strategy.

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But he said those schemes that cannot take on risk should seek higher contributions.

“Persistent low interest rates and falling gilt yields mean it remains a very challenging environment for DB schemes with 2015 valuation dates,” he said.

He added: “Scheme trustees that have followed the DB code and have assessed their options with their employer should be in a better position to cope with these changes in market conditions.

“The DB funding regime is designed to be sufficiently flexible to enable trustees and employers to agree funding strategies that meet the scheme’s funding requirements without compromising the ability of the employer to invest in their business and support the scheme in the long term.”

The nine-page statement added that the prospect of large numbers of DB to DC transfers could also affect funding levels, and warned trustees to seek advice.

Alan Collins, head of trustee advisory services at actuary firm Spence & Partners, said the funding statement contained more bad news than good.

He said: “Recovery plans should be underpinned with a clear contingency plan.

“It is no longer realistic to set a long-term recovery plan without an idea of what will happen if actual experience is significantly better or worse than expectations.

“While 2015 valuations will present many challenges, trustees should have an increasing number of tools in their armoury to tackle these effectively and ultimately improve the security of members’ benefits over the longer term.”

Key points

£44bn – deficit repair contributions over past three years.

40 per cent of schemes examined in 2014 have a deficit of less than 10 per cent of shareholders’ funds.

Deficit repair contributions would have to go up by an average of 66 per cent in order for the funding gap to be closed over the same period of time as was originally planned.

Source: The Pensions Regulator

Adviser view

David Crozier, director of County Down-based Navigator Financial Planning, said: “DB schemes are still by and large the gold-plated option, and I would want to encourage a client to stay in unless the risk or the contributions became stupid.

“Being asked to make higher contributions is problematic but wouldn’t necessarily mean you would want to leave the scheme because the contributions you would have to make in a DC scheme to get the same benefits would be so much higher.”