New defined benefit pension rules offer breathing space for employers

The Pensions Regulator is to relax the rules regarding defined benefit pension schemes, after fears that businesses are putting themselves at risk struggling to maintain funding in the current economic climate.

Publishing its first annual funding statement, the new guidelines are aimed at over one third of the UK's 6,500 defined benefit schemes and will give employers more time to plug growing pension deficits.

The new rules come in the wake of low interest rates, poor returning investments and the effects of quantitative easing (QE) on the value of defined benefit schemes, with the Pensions Regulator fearing that many businesses will be unable to meet their promises to employees unless the rules are relaxed.

Employers will be given some leeway by allowing them to to assume that investment returns will improve, in turn giving them more time to top up funds.

It is speculated the change will affect around 300 final salary pension schemes and around 600,000 members, although the Pension Regulator's own estimations believe that most schemes and employers should be able to fulfil their pension obligations to employers with either little or no change to existing plans.

Defined benefit pensions, typically known as 'final-salary' schemes, are widely considered the most generous pension policy for employees. However, faced with rising costs many companies are struggling to meet employee contributions, with many now closing final salary schemes completely to both new and existing members.

The Pensions Regulator's chief executive Bill Galvin said: "Employers that are struggling have greater breathing space to fill deficits over a longer period. However, we will draw a distinction between this group and those cases where schemes are substantially underfunded and employers are able to afford higher contributions. In such cases we will expect pension trustees to be taking steps to put their scheme on a more stable footing."

While the Confederation of British Industry (CBI) welcomed the new rules, it said the regulator had failed to address the problems of QE on pension funds adequately.

"Increases in deficits distorted by QE lead to demands for even more money from hard-pressed employers, diverting money away from investment in growth and job creation and locking it away unproductively. This can have serious implications for firms' credit ratings, as well as their ability to raise finance and their market outlook. The best form of protection for members' employment benefits is a healthy, solvent employer and the Regulator and Department for Work and Pensions should put this first."

Detailed information on the changes can be found on the Pensions Regulator website (