The Pensions Regulator (the Regulator) yesterday issued another statement outlining its approach for regulating scheme funding in the current economic climate.

Below is a summary of some of the main points made in the statement:

  • at the current time parties, should be wary of referencing FRS17/IAS19 in scheme funding discussions (these prescribe the accounting and disclosure framework of employee benefits including pensions for companies)
  • any risk margin in the assumptions for setting technical provisions (i.e. the scheme specific funding requirements) must take account of the extent to which the employer’s legal obligation and ability to fund the scheme (the employer covenant) can support them;
  • technical provisions should not be compromised to make a recovery plan appear affordable;
  • trustees should have mechanisms for regular monitoring and reviewing of the employer covenant – to allow this they should address conflict of interests and confidentiality issues;  
  • if the employers is cash constrained, trustees should look at the widest range of flexibility in recovery plans which can include:
    • lengthening recovery plans; ?step-up payments;  
    • back-end loading of recovery plans;  
    • further security through the use of contingent assets; and  
    • the distribution of profits fairly between creditors and equity providers.  

The Regulator reminds trustees that the pension scheme should be treated fairly in relation to other creditors and equity providers and not disadvantaged, regardless of the structure or duration of recovery plan that is being considered.

To accompany yesterday’s statement the Regulator has published:

  • a series of case studies on scheme funding and clearance; and
  • a speech by the Regulator’s Chair on “how to balance defined benefit liabilities with corporate health?”.  

The Regulator will also be holding a web-cast in which members of the Regulator’s board will discuss funding issues.

This is the third statement that the Regulator has made on how it will regulate scheme in the downturn –see EPB bulletin March 2009.

For background on the issues outlined in the Regulator's statement see an article "Tax and pensions: Regime under stress" we recently published in Legal Week. This article was written by David Pollard and Charles Magoffin.