The Pensions Regulator (the Regulator) has issued a statement on scheme funding to employers of defined benefit pension schemes. The statement was made as a reaction to concerns about scheme funding in current economic conditions.
The Regulator has said that employers under financial pressure may be able to renegotiate recovery plans. However the Regulator cautions that recovery plans should not generally suffer to, for example, enable companies to continue paying shareholders dividends.
The Regulator is encouraging employers and trustees to distinguish between temporary cash flow problems and longer-term structural changes to the strength of employer covenant when determining what employers can reasonably afford to pay under a recovery plan.
If the employer’s financial concerns are short-term the Regulator has suggested that a “back-end loaded” recovery plan may be more appropriate than extending the length of the plan.
If the problems are longer-term the Regulator suggests that the appropriate course of action may be to lengthen the recovery plan. It says that in such circumstances, trustees are likely to look for alternative security, perhaps using contingent assets or other mechanisms.
The Regulator has said that it is continuing to monitor the situation closely and is encouraging pension schemes and employers to contact it if they have any concerns.