Article by the pensions team
Originally Published 5th March 2009
On 18 February 2009, the Pensions Regulator issued a statement to employers of final salary schemes regarding the impact of current economic conditions. The statement emphasises that the Regulator understands that the economic climate is of real concern to employers, who need to be reassured that the current scheme funding regime is flexible enough to cope with the downturn.
The principal points made in the statement are as follows:
- Trustees generally have a shared interest in maintaining the viability of the employer. When the employer is under financial pressure, there is scope to renegotiate recovery plans. Although the Regulator is of the view that there is no reason why a deficit should push an otherwise viable employer into insolvency, the statement notes that the recovery plan should not suffer, for example, in order to enable companies to continue paying dividends to shareholders.
- Trustees must be in a position to understand what the employer can reasonably afford, but all unsecured creditors must be treated equitably so that the pension scheme should not be put at a disadvantage.
- In deciding what is reasonably affordable, the employer and the trustees must understand the difference between any temporary impact on cashflow, and longer term structural changes to the strength of the employer. The Regulator recognises that this can be difficult to judge.
- If concerns are more short-term in nature, it may be more appropriate to opt for a back-end loaded recovery plan rather than extending its term.
- If concerns are longer-term, then trustees may need to review investment assumptions in their funding plans, for example, as regards the amount of investment risk the employer can underwrite.
- If a new valuation reveals a larger deficit, then it might be more appropriate to opt for a longer length of recovery plan. In such circumstances, consideration should be given to using contingent assets.
- The Regulator wishes to encourage schemes and employers to talk to the Regulator if they have any concerns.
Comment
Although sponsoring employers face many difficulties in meeting their duties both to their pension scheme and their shareholders, trustees and employers should derive some comfort from the Regulator's assurance in the statement that it will "continue to apply the flexibilities in the system pragmatically, looking for outcomes in the best interests of the scheme and the sponsor."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.