A financial watchdog is warning firms not to deliberately underfund workplace pensions that could leave savers with less money than they expected on retirement.
The Pensions Regulator issued the warning as part of a consultation into a new direct benefit scheme code of practise for employers.
Employers who can raise the cash will be expected to clear any pensions in the red within six years.
Defined benefit pensions are offered by employers to workers.
They promise to pay a guaranteed monthly income that rises in line with inflation and offers other benefits, like spouse pensions and enhanced annuity rates.
Time limits to settle pension deficits
But the employers with pension schemes in deficit have no specific time frame to make up the missing cash.
The industry rule of thumb is a scheme must make up the shortfall within seven years of a valuation identifying a deficit.
TPR is proposing schemes in the red backed by ‘stronger’ employers should have the time to fully fund the scheme capped at six years, while ‘weaker’ schemes will have up to 12 years to put things right.
The consultation paper does not define ‘strong’ but suggests employers fit the bill that are market leaders, show good growth prospects, belong to a wider group or have spare cash to support the pension scheme.
Poor funding levels
The TPR also wants some companies to divert cash from dividend payments to shareholders to pay down pension shortfalls.
The plans were unveiled in a 190-page consultation document which the TPR wants to bridge a lack of clarity over funding defined benefit pensions.
“With most DB schemes closed to new members and/or future accruals, we can expect them to be significantly mature in 15 to 20 years’ time, with most of their members retired. These schemes will be more vulnerable to risks associated with poor funding levels and shorter investment horizons. Therefore, trustees should aim to reduce their scheme’s reliance on the sponsoring employer as they mature,” said David Fairs, executive director of regulatory policy at The Pensions Regulator.
“We want to be confident our expectations are effective and appropriate for trustees and in turn the savers in these schemes.”