This week, The Pensions Regulator (TPR) reminded trustees of defined benefit pension schemes that, when considering their funding recovery plans, their investment and other assumptions require to be prudent and realistic, and not based on results that may be extremely difficult to achieve. This is the case even if the employer's financial covenant is considered to be strong.
However, it also reminded trustees that when agreeing the employer contributions that require to be paid under the recovery plan and the recovery period, they must take into account what is affordable for the employer and, in that context, the current economic climate may have a bearing on matters.
David Norgrove, TPR Chairman, said: "Where sufficient prudence has been built into funding targets, a sensible consideration about the length of the recovery plan and schedule of annual payments can occur. That’s the balance we need to strike to best secure member benefits for the long-term and to enable employers to play their part in the economic recovery".
In light of the foregoing, employers may wish to revisit their schemes' current recovery plans.
Where economic circumstances mean that an employer's ability to contribute to its scheme is limited, it and the scheme trustees may wish to consider additional options, such as putting in place 'contingent assets'. These could include group company guarantees or securities over land or cash and can result in savings in the Pension Protection Fund levy that is payable, meaning that any savings can be applied to eliminate any funding shortfall or used by the employer to offset its contributions to the scheme.