Pensions Regulator Statement on Pension Scheme Funding: ‘No Olive Branch’ To Employers or Trustees
Commenting on the Pensions Regulator’s statement today on pension scheme funding, KPMG Pensions Partner, Mike Smedley, said:
“Although this was originally billed as a response to current market conditions and Quantitative Easing, in practice there is no olive branch for employers and the Regulator has significantly raised the stakes for both Trustees and sponsors.
“While the industry was crying out for easements to reflect gilts markets and QE, instead we have a new set of rules and constraints.
“The Regulator seems to be taking a step change in approach, raising the bar for trustees and employers and laying down some clear markers of what it expects to see in valuations – and as importantly what it does not expect to see.
“The message comes through loud and clear that the Regulator expects strong companies to meet deficits while they are in good financial health, and will be less tolerant of long recovery plans.
“Although the statement applies from September 2011, companies with earlier valuations that are close to completion may suddenly find the rug pulled from under them if the Trustees seek to take account of the new guidance.”
According to KPMG’s pensions team, today’s statement from the Pensions Regulator also goes beyond actuarial valuations due now – making a number of statements that appear to apply to all valuations going forward.
The Regulator’s statements highlight a number of “rules” that it expects to apply to valuations, apparently taking away some of the flexibility for schemes. For example the statement includes strongly worded comments about what it expects to apply in most situations, recognising that there will always be exceptions.
Assumptions for expected asset returns in calculating any deficit should be the same or lower than the previous valuation.
Deficit contributions should not fall – in fact they would like to see an increase in line with business performance.
In most cases Recovery plans shouldn’t lengthen over current plans.
Valuation dates shouldn’t normally be moved from their triennial cycle.
In KPMG’s view, the statement also signals much greater intent to intervene in individual cases and to challenge Trustees on their thinking.
In particular the statement will force Trustees to clearly document their pension strategy (including contingency plans) in the context of the actuarial valuation, employer covenant and investment strategy – and be prepared for them to be subject to Regulator scrutiny.