Review of Pensions Conference 2012 session - The Pensions Regulator: Pension scheme funding in the current environment
Presenters: Tim Keogh and Chinu Patel from the Pensions Regulator (TPR)
Pension Scheme Funding in the Current Environment
A session was held at the 2012 Pensions Conference to clarify what TPR expects from trustees, and what trustees can expect from TPR, in the light of TPR’s April Statement. This paper summarises the key points made by the presenters.
- Although deficits have generally increased as a result of volatile markets and low gilt yields, TPR expects that many pension schemes should be able to clear the increased deficits with only modest adjustments to existing Recovery Plans. However, it acknowledges that the effect on a particular pension scheme will depend on the circumstances of that scheme and its sponsoring employer.
- Technical Provisions must be measured using prudent assumptions having regard to the employer covenant. Where asset outperformance is built into discount rates, TPR expects trustees to be able to show that the employer covenant can support the pension scheme should the outperformance fail to materialise. One way to demonstrate this would be for actuaries to quantify the outperformance margin and for trustees to assess how this compares with the value of the employer covenant under different scenarios. TPR expects that the test of the employer covenant should be robust.
- TPR accepts that some trustees may have strong views about gilt yields reverting to more recent levels but will expect trustees to be able to demonstrate that if current gilt yields persist, the employer will be able to support any implied outperformance in the discount rates. The test should be against the prevailing risk-free rate. TPR recognises the difficulties caused by current economic conditions but expects this to be reflected in Recovery Plans rather than through Technical Provisions.
- Recovery Plans can be extended where affordability is an issue. Current conditions should not be used as an excuse for underfunding or cutting back on Recovery Plans where contributions would otherwise be affordable. TPR expects recovery contributions to be at least maintained in real terms. Where contributions are reduced or where the recovery period is materially increased, TPR expects this to be fully justified and documented.
- TPR will be focussing on affordability and trustees can expect more scrutiny in this area. TPR recognises that there are competing demands on an employer’s cash. It is concerned that the pension scheme should get an equitable share taking account of competing demands.
- Trustees are urged to take a joined-up, integrated approach to pension scheme governance. This involves three prongs: Risk (including investment and funding risk), Funding and Covenant. TPR will expect to see evidence of this integrated approach.
- TPR will be more pro-active in its processes. There will be early engagement in the actuarial valuation process particularly on those larger pension schemes which are high risk.
- Trustees and others should expect in due course to provide more information to TPR than at present. This may include more information on pension schemes which are in surplus.
- The TPR is developing new triggers. It is possible that the 10 year trigger for Recovery Plan length may become less significant as a consequence.