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LONDON (Reuters) - A shake-up in the way companies plug funding gaps in their pension schemes could generate as much as 10 billion pounds ($16 billion) in tax revenue for Britain's cash-strapped government.
Chancellor George Osborne is calling on the UK's Pensions Regulator to relax rules that force companies to use their own cash reserves to top up final-salary pensions for thousands of workers.
The existing rules require companies to plug these deficits as soon as they are identified, often using their own funds. But if companies have the freedom to make smaller, annual payments to their pension schemes, they will free up more cash on which the Treasury can charge more corporation tax.
"This has cost the Chancellor 37 billion pounds in lost tax revenue to date, and could be as much as 10 billion pounds a year in future years," Tracy Blackwell, of the specialist insurer Pension Corporation, said in a statement.
Pension scheme deficits are making it difficult for companies to invest in other assets and attract external funding, resulting in many becoming frustrated at having to plug spiralling shortfalls caused by factors out of their control.
The total deficit of final-salary company pension schemes more than doubled to 231 billion pounds within a year as repeated rounds of central bank quantitative easing crushed the yield on British government bonds, or gilts - a staple investment for pension funds.
Companies have been pouring money into pension contributions when they could have been using the cash for other investments.
In addition, a Department for Work and Pensions consultation will look to find a new way for companies to calculate the ultimate cost of these pension schemes.
This could allow the schemes to take a longer-term view of expected returns to value their liabilities, which allows a company to camouflage the weakness of a pension scheme.
News of the consultation has prompted criticism from pension consultants, who claim that reforms would only deliver a short-term fix, which could also mask realistic assessments of pension deficits.
Editing by David Goodman