Scheme funding: The Pensions Regulator is always watching

The seemingly Sisyphean task of paying off the defined benefit pension schemes' funding deficits grinds on. The scheme-specific funding regime provides for trustees and employers to agree a recovery plan to clear any deficit in the scheme over a reasonable period at the scheme's triennial valuation. This can be a difficult negotiation as employers want to limit their contributions to the minimum required, whilst trustees want to clear deficits as fast as reasonably possible, and these positions are difficult to reconcile.  
A recent section 89 report by the Pensions Regulator (the Regulator) highlights the need for parties to eventually come to an agreement. The report details the Regulator's involvement in a protracted funding dispute between the trustees of the Docklands Light Railway (DLR) Pension Scheme (the DLR Scheme) and the Scheme's employer, Serco Limited (Serco), and demonstrates the Regulator's willingness to exercise its powers where schemes have missed statutory deadlines.

Background

The DLR Scheme is a defined benefit occupational pension scheme, and the problems between the DLR Scheme's trustees and Serco first arose in 2009. The list below sets out the key events in the dispute and the actions taken by the Regulator.

  1. Serco and the trustees failed to agree on the 2009 actuarial valuation by the statutory deadline of 30 June 2010. More importantly, they were unable to agree on the terms of a recovery plan to clear the deficit and a schedule of contributions. During this time, the Regulator facilitated discussions between the parties to explore whether they could agree.
  2. By 2012, it was clear that the parties' discussions were unsuccessful, and this prompted the Regulator to consider exercising its funding powers under section 231 of the Pensions Act 2004 by issuing a warning notice on the parties and the DLR. In particular, the notice sought to compel the DLR Scheme trustees to obtain skilled persons reports on the scheme's funding position and the strength of Serco's covenant.
  3. In late 2013, the trustees issued court proceedings against Serco to recover contributions, and the Regulator suspended its action pending the outcome of the proceedings. Due to the time taken to address the 2009 valuations, the parties also missed the 15-month statutory deadline for the 2012 actuarial valuation.
  4. The parties eventually reached a settlement in November 2014 whereby the deficit revealed by the 2012 valuation (£36.1 million) would be cleared by January 2018. The relatively short recovery plan appeased the Regulator, who decided not to take any further action.

Comment

This is the first time a section 89 report has been issued in respect of a scheme funding case, and the Regulator is eager to show its "low tolerance for late actuarial valuations". In particular, the Regulator is conscious of the uncertainty and risks caused by late actuarial valuations and is not afraid to step in to address non-compliance. Therefore, trustees and employers must understand the importance of finalising actuarial valuations and funding documents in a timely fashion. In addition, despite the Regulator's intervention, the report demonstrates how protracted a funding dispute can become (three years in this case), which can give rise to higher costs and secondary problems, e.g. missing statutory deadlines.