Pensions Regulator taking "more pragmatic approach" to scheme funding, says expert

The annual funding statement from the regulator (8-page / 90KB PDF) encourages scheme trustees to "take an integrated approach" to managing the risks to their scheme, to include considering what an employer can afford as well as the scheme's funding level and overall investment strategy.

Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that the statement showed that the regulator was "moving in the right direction". However, questions remained for trustees and employers in relation to the new statutory objective for the Pensions Regulator, previously announced by the Chancellor of the Exchequer.

"The precise wording of this new objective is not yet known; leaving the regulator, and consequently schemes, rather in limbo," he said.

"The Pensions Regulator's approach is still evolving, and this may prove tricky for schemes with valuations to sort out. The new funding statement reminds us that the regulator will consult this coming autumn on revisions to the scheme funding Code of Practice and on its approach to regulating DB schemes - and this strategy will not be published until early 2014," he said.

The new statutory objective will require the regulator to consider the long-term affordability to sponsoring employers of plans to pay back a scheme deficit. The exact wording of the objective will be confirmed in legislation shortly. The Pensions Regulator currently has five statutory objectives which focus on the protection of members, their benefits and the interests of the Pension Protection Fund (PPF), which compensates pension scheme members in the event of employer insolvency.

In this year's funding statement, the regulator clearly states that trustees have a degree of flexibility available to them when setting the 'discount rate', used to calculate the scheme's liabilities during its regular valuations. Under the relevant legislation rates must be chosen "prudently"; however, trustees can take account of either the yield on assets held by the scheme or the yield on Government or high-quality bonds when doing so.

Trustees should "adopt an approach that best suits the individual characteristics of their scheme and employer", the regulator said. When doing so, they should document their reasons for any change and have "due consideration to any increase in risk this might bring", the regulator said.

Trustees should also take advantage of the "flexibilities available" in scheme recovery plans, in order to "ensure that they are appropriately tailored to the scheme and employer's circumstances", the regulator said. This should include an employer-specific assessment of "what is reasonably affordable", it said. Although trustees should consider whether the current level of contributions could be maintained "as a starting point", they may need to consider whether it is appropriate to agree to lower contributions "where there are significant affordability issues", the regulator said.

"A strong and ongoing employer alongside an appropriate funding plan is the best support for a scheme," the statement said. "Where there is tension between the need for scheme contributions and for investment in the employer's business, it is important that the solution found neither damages the employer's covenant nor benefits other stakeholders at the expense of the scheme."

 "The treatment of the pension scheme should be compared to that of other stakeholders, taking account of their priority ranking, and continue to reflect the scheme's status as a creditor to the employer," the statement said.

The statement also sets out the Pensions Regulator's commitment to use of a broader number of risk factors to decide whether a particular scheme is at risk. Trustees should also adopt an "integrated approach to risk management", it said. However, pensions law expert Simon Tyler said that this additional flexibility made it less clear how the regulator would decide when to intervene on schemes.

"Trustees and employers will no doubt welcome the regulator's shift away from fixed triggers, such as 10-year or FRS17-based triggers," he said. "However, its pledge to 'continue to evolve our suite of risk indicators as part of our filter mechanism' needs some refining."