The Government has this week published its Pensions Bill, which will implement a number of changes to pension legislation. Most notably for trustees and employers of defined benefit pension schemes, the Bill sets out the precise wording for the Pensions Regulator’s new statutory objective (see our Budget 2013 update).
Under the new provisions, the Pensions Regulator will be required to exercise its functions in a way that will “minimise any adverse impact on the sustainable growth of an employer.” This means that, for the first time, the Pensions Regulator will have to balance its existing objectives – which include protecting members’ interests and minimising the risk of calls on the Pension Protection Fund – with the interests of sponsoring employers.
This balancing act is reflected in the Pensions Regulator’s annual funding statement for 2013, also published this week. The statement acknowledges the tension between making scheme contributions and investing in the employer’s business, and emphasises the need for trustees to take account of what is reasonably affordable for the employer. Trustees are encouraged to allow for an appropriate level of risk that is neither overly prudent nor overly optimistic.
Commenting on the funding statement, Michael O’Higgins, chair of the Pensions Regulator, advocated “long-term strategies with employers that protect the interests of retirement savers, while also enabling viable businesses to thrive and grow.” Exactly what form such strategies might take will depend on the circumstances of each scheme and employer, but it is clear that the Regulator expects trustees to be flexible and consider the long-term growth of their sponsoring companies.
The Pensions Regulator has also announced plans to consult on its scheme funding code of practice later in the year. The consultation will focus on the new objective, as well as considering issues of integrated risk management and regulation of defined benefit schemes.
It should be noted that this new regulatory objective will only apply in the context of scheme funding. In exercising its other functions, such as issuing clearance for corporate transactions or considering whether to exercise its moral hazard powers, the Pensions Regulator will not be required to take account of employer sustainability.