A Practical Approach for Employers on Pension Scheme Funding?

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March and April 2009 have proved to be one of the worst times for employers to have a statutory valuation for their pension schemes. Asset prices were severely depressed in March/April 2009.

UK Employment and HR

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Originally published 10 February 2010

Keywords: pension scheme funding, Pensions Regulator, statutory valuation, asset returns

March and April 2009 have proved to be one of the worst times for employers to have a statutory valuation for their pension schemes. Asset prices were severely depressed in March/April 2009. Stock markets have rallied considerably since then. Subsequent asset returns are, therefore, likely to have far outstripped the assumed investment returns built into a scheme's technical provisions.

In light of this, the Pensions Regulator has issued an update to its guidance on scheme funding to say that trustees can take account of improvements in funding since the effective date of an actuarial valuation.

The Pensions Regulator stresses that the guidance is issued in response to exceptional market conditions and trustees must still act in accordance with the interests of scheme members.

In practical terms, favourable asset returns may be reflected in the recovery plan and in the schedule of contributions by asking the scheme actuary to update figures from the effective date to reflect the actual scheme investment experience.

Comment

The Pensions Regulator has proved sympathetic to the position of employers in the recent economic climate. It stresses that employers should only be asked to pay what they can reasonably afford. The latest guidance continues that pragmatic approach. Employers should consider taking advantage of the Pensions Regulator's guidance on post-valuation increases in asset performance.

Although there is nothing explicit in the Regulator's guidance, the principle would appear to work both ways. If there were subsequent deteriorations in asset performance after the effective date of a valuation, then the trustees may wish to take account of that. Approaching the trustees now increases the risk of the trustees taking this approach in the future. This is something an employer may want to bear in mind in approaching the trustees.

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