Proposed amendments to U.K. pension regulations could lead to the extinction of smaller defined benefit plans within 15 years, according to Charles Cowling, chief actuary at Mercer.
“The potential impact of these new regulations would be significant and dramatic,” he said in a press release. “The draft proposals would force the sale of £500 billion of return-seeking assets, the majority being required before 2040.”
According to Guy Opperman, the U.K.’s minister for pensions and financial inclusion, the proposed changes to the occupational pension schemes (funding and investment strategy and amendment) regulations aren’t designed to serve as a death knell for DB plans. He said the proposed changes aimed to strike a balance between ensuring long-term security of pensions and their affordability.
“These draft regulations detail new arrangements focusing on ensuring that pension benefits can be paid over the longer term and that all members have the best possible chance of receiving the pensions they have been promised.”
The restrictions on mature plans could lead to an increase in annuity purchases, said Cowling, estimating that they could add £200 billion to the U.K.’s DB plan liabilities within the next 10 to 15 years. This would, potentially, exceed the annuity market’s capacity.
“The regulations would significantly accelerate the buyout of DB pension scheme liabilities, such that we might expect to see the demand for the settlement of up to £200 billion of pension scheme liabilities each year for the next 15 years. What isn’t clear yet is whether this accelerated demand could be met by current market participants.
“Trustees work in the interest of securing members’ benefits and must be given the flexibility to take steps necessary to deliver on this responsibility in a proportionate and appropriate way,” he added.
Cowling’s concerns are being raised during a 12-week review period in which members of the U.K.’s pension sector are invited to submit written feedback about the new regulations to the Department of Work and Pensions.