In his Budget statement on 20 March 2013, the Chancellor George Osborne announced that the Pensions Regulator will be given a new additional statutory objective to support scheme funding arrangements that are ‘compatible with sustainable growth for a sponsoring employer and fully consistent with the 2004 funding legislation’.

The statement reads:

‘The Government will provide the Pensions Regulator (TPR) with a new objective to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer and fully consistent with the 2004 funding legislation. The precise wording of this new objective will be set out in legislation that the Department for Work and Pensions (DWP) will publish later in spring 2013. Implementation of the new objective will be subject to review after 6 months and TPR will revise its Code of Practice to reflect their forthcoming new objective as soon as possible in 2013.’

This announcement follows the Department of Work and Pensions (DWP) consultation on this issue earlier in 2013.

The Minister for Pensions Steve Webb said:

‘The best guarantee of a pension scheme keeping its promises is to make sure that the sponsoring employer prospers. This new objective for the Pensions Regulator will help ensure that trustees and employers have the flexibility to come up with plans which deal with pension scheme deficits and benefit both scheme members and firms.’

The Regulator’s current statutory objectives (in the Pensions Act 2004) focus on the protection of benefits under pension schemes and the protection of the Pension Protection Fund (PPF) against the risk of increased liabilities. This has generated comments that the regime does not allow for other critical economic issues to be balanced against these objectives.

The aim of the new objective looks to be to encourage the Regulator to take a more balanced policy view of funding plans, weighing the interests of scheme members looking for security against the cost to the employer of achieving security. This may lead to an easing of funding pressure on defined benefit (DB) scheme sponsors, freeing up funds to channel into their businesses rather than into their pension deficits.

On the other hand, this new objective may cause a shift in the balance of power from scheme members to scheme sponsors. Indeed, DB scheme sponsors with large sums of money at stake may be more ready to attack or challenge the Regulator’s decisions. The Regulator may also need to take a different approach towards proposals towards which it has previously been hostile, such as pre-pack sales out of administrations. Moreover, it may lead to funds increasingly being diverted away from financing pension deficits. Larger deficits would reduce security for members and potentially increase the likelihood of schemes having to cut benefits and being assisted by the PPF.

Draft legislation to implement the new objective will be published by the DWP in the spring of 2013. Once enacted, the legislation will be reviewed after six months.

The Regulator’s chairman, Michael O’Higgins, commented:

‘We regulate according to the legislative framework set by Government and Parliament.

In light of the Government's proposal for a new objective to take account of the sustainable growth plans of the sponsoring employer, we will make the changes required, building on the 2004 funding regime, as part of a review of the Code of Practice for defined benefit (DB) funding that we will launch as soon as possible this year.

In addition, we will shortly publish an annual funding statement which will set out our guidance to trustees in the context of current economic circumstances, including the flexibilities available to trustees and company sponsors in the current regime, particularly the freedom to choose the basis on which contribution levels and valuations are calculated.

We will engage fully with stakeholders and the industry on both the revision of the Code of Practice and the next annual funding statement.’

The Government is also consulting on a new growth duty for non-economic regulators, aimed at ensuring that regulators uphold the highest standards of public protection without holding business back. The Treasury hopes to apply this new duty to the Pensions Regulator.

Following consultation, the Government will not be pursuing a change in legislation to permit the ‘smoothing’ of asset values and liabilities in funding valuations. This would have involved the averaging of asset prices and discount rates over a longer period of time, instead of using current market spot rates. The Budget Report states that the DWP consultation ‘did not reveal a strong case’ for amending existing legislation. Industry bodies such as ACA and NAPF have welcomed this decision.