A new law allowing co-habiting couples to register as civil partners could add billions to the liabilities of defined benefit (DB) pension schemes.

Using actuarial data of company pension schemes and the latest Office of National Statistics (ONS) family and household figures, Royal London and Lane Clark & Peacock (LCP) conducted an analysis on the potential cost of the new legislation.

Triggered by the unopposed Second Reading of the new private member’s bill prepared by Conservative MP Tim Loughton in the House of Commons on 2 February, the analysis found pension liabilities could increase by billions of pounds.

Many pension schemes currently provide survivor’s benefits to married couples or same sex civil partners, but long-term cohabiting couples receive little or nothing. The new law would, for the first time, require the government to look into allowing cohabiting opposite sex couples to register a civil partnership – allowing them occupational pension rights and access to tax breaks and benefits.

Although a good thing for millions of members who would be granted new pension rights, if the true cost to schemes of the new legislation was even 1% of current liabilities, this would represent an additional £3bn in costs.

Commenting on these estimates, Royal London director of policy Steve Webb (pictured) 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.

Webb added: “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.”

As part of the analysis, a survey by LCP suggested that around 15% of the liabilities relate to payments for future widows and widowers of existing company pension scheme members. As the total liability of private sector DB schemes is approximately £2trn according to LCP, this would suggest roughly £300bn is in respect of future widows and widowers.

In the UK there are roughly 12 million married couples and a little over three million cohabiting couples, so the bill for future cohabiting partners could add up to a quarter to the current £300bn cost.

However, LCP suggested the true cost is likely to be much less than this as the age structure of DB pension schemes means cohabitation rates are likely to be much lower among DB members than among the population as a whole.

The standard assumption for a DB scheme would be that 80% of its members are married, and a good proportion of the remainder would be single rather than cohabiting, according to LCP.

Commenting on the figures LCP partner Jonathan Camfield, added: “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.”
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Blog originally published by Professional Pensions.

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