Welfare Reform on the Web (June 2007): Pensions - UK

Pyrrhic victory? The unintended consequences of the Pensions Act 2004

A. Byrne and others

Pensions, vol. 12, 2007, p. 59-67

The government introduced the Pensions Act 2004 to ensure that occupational pension schemes are sufficiently well funded to meet their liabilities to members. At present most defined benefit schemes register a deficit and in a significant minority of cases this is large relative to the sponsoring company’s market capitalisation. The Act introduces a framework for restoring defined benefit pension scheme solvency over a short recovery period. Research suggests that this will risk alienating the voluntary corporate sponsors upon which occupational pensions in the UK rely, by reducing their ability to manage this significant business risk. This could lead to the majority of defined benefit schemes being closed in the next five to ten years.