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New civil partnership law could put pressure on pension schemes

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A potential new law on civil partnerships currently being debated in Parliament could add several billion pounds to the liabilities of company pension schemes, according to analysis by insurance giant Royal London and pension consultants Lane Clark & Peacock (LCP).

The ‘private member’s bill’ from Conservative MP Tim Loughton would, if passed, allow opposite sex couples to register a civil partnership. It received an unopposed Second Reading in the House of Commons on February 2.

As it stands, co-habiting couples often receive little or nothing from their partner’s pension scheme, regardless of the length of their relationship. Most pension schemes only provide survivor’s benefits to married couples or same sex civil partners. If the law goes through, couples will receive improved occupational pension rights and access to other tax breaks – such as inheritance tax and the ability to transfer assets free from capital gains tax.

However, the move would spell bad news for already over-stretched pension funds, adding several billion pounds to pension fund liabilities.

A survey by LCP suggested that around 15% of the liabilities of company pension schemes are in respect of payments to future widows and widowers of existing pension scheme members.  The total liability of private sector defined benefit schemes is approximately £2trn, 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 an extreme assumption would be that the bill for future cohabiting partners could add up to a quarter to the current £300bn cost. That said, LCP said the true cost may be lower for a number of reasons:

  • The age structure of DB pension schemes is such that cohabitation rates are likely to be much lower among DB pension members than among the population as a whole; indeed, a 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;
  • Some of those who are currently cohabiting will go on to marry and therefore are already counted in the future liabilities of schemes;
  • Not all cohabiting couples will necessarily take up the right to register for a civil partnership;
  • Whereas pension rights for widows generally go back decades, rights for cohabiting partners might only start from the date the new legislation is introduced;
  • Some schemes already make provision for cohabiting partners to receive survivor’s benefits;

However, even if it was just 1%, this would still represent an additional £3bn in costs.

Steve Webb, director of policy at Royal London, 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. 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.”

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