Defined BenefitFeb 15 2018

New law could add billions to pension scheme liabilities

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New law could add billions to pension scheme liabilities

A law currently going through parliament could add several billion pounds to the liabilities of company pension schemes.

Analysis by Royal London and pension consultants Lane Clark & Peacock (LCP) found a private member’s bill introduced by Conservative MP Tim Loughton could add as much as £75bn in liabilities.

The bill calls on the government to allow opposite sex couples to register a civil partnership for the first time and it received an unopposed second reading in the House of Commons on 2 February.

At present many pension schemes provide survivors’ benefits only to married couples or civil partners, while cohabiting couples may get little or nothing.

But once those couples can register as civil partners they will have access to benefits, which, according to LCP, amount to about 15 per cent of the liabilities of company pension schemes.

LCP estimated the total liability in respect of future widows and widowers to be about £300bn based on a total liability of private sector DB schemes of £2trn.

Jonathan Camfield, partner at LCP said: “We estimate that liabilities in respect of future widows and widowers probably account for around one pound in six of all the liabilities of DB pension schemes. 

"Even a modest change to eligibility for survivor’s benefits could add a significant absolute amount to DB pension scheme costs.”

He said there were about 12 million married couples in the UK and a little more than 3 million cohabiting couples, meaning under an extreme assumption future cohabiting partners could add up to a quarter to the current cost.

While the true impact is likely to be much less than this, even a 1 per cent share would present an additional £3bn in costs, Royal London and LCP said.

There are several reasons why liabilities may be lower than expected.

For instance, the age structure of DB pension schemes is such that cohabitation rates are likely to be much lower among DB pension members than among the population as a whole.

A standard assumption for a DB scheme would be that 80 per cent of its members are married, and a good proportion of the remainder would be single rather than cohabiting, the firms said.

Some of those who are currently cohabiting will also go on to marry and are therefore already counted in the future liabilities of schemes.

Not all cohabiting couples will necessarily take up the right to register for a civil partnership and for those that do, new rights might only start from the date the new legislation is introduced.

Furthermore, some schemes already make provision for cohabiting partners to receive survivors' benefits.

Sir Steve Webb, director of policy at Royal London said: "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.  

"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."

James Jones-Tinsley, a former adviser now technical specialist at self-invested personal pension provider Barnett Waddingham, agreed pension scheme liabilities would be affected but said the exact impact was difficult to predict.

He said: "The extent to which pension scheme liabilities will increase, and by how much, depends on two key factors: firstly, whether Tim Loughton’s private member’s bill actually makes it onto the statute books, and secondly, the extent to which cohabiting partners decide to register for a civil partnership. 

"As a result, it is extremely difficult to put a price tag on this, at this stage, although it is true that, currently, pension schemes typically only provide survivor’s benefits to either married couples or civil partners, but not to cohabitees."

carmen.reichman@ft.com