The Pensions Regulator has published the final version of its Code of Practice on funding defined benefit pension schemes, along with its annual statement for schemes undergoing actuarial valuations in current market condition. Commenting on the documents, Graham McLean, a senior consultant at Towers Watson said:

“As with most of the Regulator’s statements, there is something for the ‘pension deficit hawks’ and something for the ‘doves’. The Regulator does not want to be seen as a brake on economic recovery, but nor does it want to be blamed for not getting the money out of employers while it had the chance.

“The government has told the Regulator to ‘minimise any adverse impact on the sustainable growth of an employer'*. Now, the Regulator has copied and pasted this phrase when setting out what it expects trustees to help deliver – even though trustees’ duties to scheme members have not been watered down. This is the main change from the draft Code that was published in November and looks like a lobbying victory for employers – though the Regulator still emphasises that trustees need to understand and manage risk.

Money Growth (PD)“For many schemes, the goalposts may not have moved very much in practice as funding has always been about balance. Where the employer feels that investing in the business is a much better use for the cash and the trustees take a different view, the Regulator’s new objective may embolden scheme sponsors to stand their ground. However, the Regulator has also hinted that many employers can afford to spend more on tackling their pension deficits than they are currently doing.  It wants to keep employers guessing about how it would act if push came to shove and not encourage too much intransigence.”

Analysis published by the Pensions Regulator alongside its annual statement looks at the position of schemes who must agree new funding plans based on recent market conditions, having last gone through this process three years earlier. Even if these schemes extend deficit recovery periods by three years and make a meaningful increase to the investment outperformance assumed in the discount rate, 60 per cent would still require higher contributions.

Graham McLean said: “Many schemes face being in deficit for longer even if the employer does increase contributions.  There will be a lot of tough choices but the Regulator only has the resources to intervene meaningfully in a minority of cases.  For the time being at least, it has decided not to publish the details of the key risk indicators that it will use to filter schemes, partly because of concern that this would become an unofficial funding target.

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