On 27th April 2012 the Pensions Regulator published its first annual funding statement which provides advice on how pension scheme funding valuations should be dealt with in the current economic climate. The statement is aimed at trustees and companies with defined benefit pension schemes which have triennial scheme valuation dates between September 2011 and September 2012.
The overall message is “business as usual” and is in line with previous statements made by the Regulator regarding the difficult economic climate. Although the Regulator recognises that the current economic conditions will put pressure on defined benefit pension scheme funding, it believes that there is sufficient flexibility within the funding framework so that, in practice, most schemes and sponsoring companies should be able to meet their pension promises to members without significant adjustments to their current deficit recovery plans.
As a starting point, the Regulator therefore expects that the current deficit contributions should be maintained in real terms. It will seek strong justification where a reduction is proposed. The Regulator did, however, acknowledge that where affordability is a challenge for sponsoring companies, trustees may need to agree to a longer recovery plan (though a material extension to the recovery plan end date will require sound justification).
Many companies had hoped that the Regulator would permit schemes (whose liabilities have recently increased due to historically low gilt yields and the effect of quantitative easing) to make an allowance for an anticipated improvement in market circumstances. However, the Regulator dismissed this suggestion, commenting that “it would not be prudent to try to second guess market movements by assuming that gilt yields will inevitably improve in the near term…”.
The Regulator’s statement can be found at www.thepensionsregulator.gov.uk/professionals/professionals-in-depth.aspx#s5201