The Pensions Regulator has published its second annual funding statement, aimed at those schemes which are due to undergo a triennial valuation between September 2012 and 2013. The statement builds on its message from last year, emphasising that the statutory funding regime incorporates a number of flexibilities, and noting that trustees may need to take greater advantage of these than in previous years given the difficult market conditions.
The statement confirms that the Regulator is moving away from a limited number of simple triggers (including recovery plans over ten years), to a broader collection of risk factors which are set out under the headings of (1) investment returns and setting discount rates, (2) setting appropriate contributions and recovery plans, and (3) use of flexibilities and understanding of risk. Trustees should allow for a level of funding and investment risk that is "neither overly prudent nor overly optimistic", and the statement notes the Regulator's new statutory objective of encouraging employer growth.
Pensions Regulator Chairman Michael O'Higgins said that he wants "to see pension trustees agree long-term strategies with employers that protect the interests of retirement savers, whilst also enabling viable businesses to thrive and grow. We expect them to mitigate the risks to their scheme, but this does not require them to be overly prudent". He recognises that "some employers will struggle to pay [the previously agreed level of deficit] contributions, and may need to make use of the flexibility within the system".
Perhaps unsurprisingly, the Regulator's analysis of this tranche of schemes has revealed a growth in liabilities that exceeds that of assets in the last year. The funding position of these schemes is what has led the Regulator to accept that they may need to make more widespread use of the flexibilities in the funding regime than in previous years.
In practice, it is generally expected that the Regulator's approach to regulating scheme funding is likely to change in light of the new statutory objective set out in the Pensions Bill 2013, which requires the Regulator "to minimise any adverse impact on the sustainable growth of an employer" in the exercise of its scheme funding functions. At present, the pensions industry is generally waiting to see whether this will lead to a more pro-employer regulatory environment. Given the 15 month valuation period, it will be interesting to see whether any affected schemes seek to prolong finalising their triennial valuation in the hope that the new statutory objective, and a revised Code of Practice and accompanying guidance, is then in place.
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