The Pensions Regulator chief executive Bill Galvin says he will ease the funding requirements on defined-benefit pension schemes in April as tumbling gilt rates push up deficits.
In an interview with Money Marketing, Galvin says TPR will release a statement in April detailing the measures to help schemes struggling to close soaring deficits.
Over the past year, the eurozone crisis and the Government’s quantitative easing programme have caused a spike in demand for UK gilts. As a result, gilts are becoming more expensive, depressing interest rates and reducing the return on pension fund investments.
Last week, the Bank of England announced plans to buy a further £50bn of gilts, bringing its total quantitative easing programme to £275bn.
Galvin says: “We are investigating options to ease the burden on defined-benefit pension schemes. We are going to make a statement in April because the majority of schemes have valuation dates at the end of March. It seems sensible to us, rather than saying something in advance, to hold off.
“Economic conditions in 2012 have not been great for pension schemes doing valuations, particularly because of low gilt yields. At the moment, we are talking to a number of the bigger schemes and the actuaries who are working through the valuations.
“In April, we will acknowledge that QE, alongside other factors, has had an impact on schemes and there are certain ways people can address that which we will find sensible.”
The decision follows mounting pressure from the pension industry for the regulator to take action to help schemes manage their deficits.
Last October, the National Association of Pension Funds warned the regulator that failure to address the problem would see schemes facing a “valuation lottery” as they are forced to pay more into deficit recovery plans.
Former NAPF chairman Lindsay Tomlinson said the regulator could help schemes by extending recovery periods, smoothing triennial valuation results or deferring valuation dates.
Galvin says the regulator will resist calls to allow schemes to smooth valuation results.
He says: “A number of people have asked us to give some indication as to how we might look at people who want to smooth gilt rates around the year-end. It is unlikely we will do that.”
While the problems posed by struggling DB pension schemes remain at the top of the regulator’s agenda, automatic enrolment and the future of defined-contribution provision are also key priorities for this year.
Galvin says he wants to improve demand-side forces in the pension market by discouraging employers from using small- scale DC pension schemes with fewer than 1,000 members for auto-enrolment.
He says: “One area we will be focusing on is the big number of schemes that might be sub-scale in a DC context. There are about 4,000 schemes with between 12 and 1,000 members. Our view is it is difficult to be a significant player in the pension market if you have less than 1,000 members.
“We would expect trustees of very small DC schemes to ask themselves very serious questions about whether it is possible to meet our six principles for good provision if they have fewer than 1,000 members. If it is not, it may be that they are not the right vehicle for an employer to use for auto-enrolment.”
Galvin concedes the Government’s decision to delay auto-enrolment for firms with fewer than 50 employees forced the regulator to postpone vital communications to employers and advisers less than a year before the new rules come into force.
He says: “I am sure we can get back on track without any long-term damage done to the level of awareness and understanding among employers and adv isers about the reforms.”
Pensions minister Steve Webb was criticised by IFAs last month after he told a work and pensions select committee hearing it would be “crazy” if most firms had to seek out expensive financial advice on auto-enrolment. He claimed the similarity between vanilla products will mean advice will not be needed.
Galvin says: “We believe there is a role for advisers in helping employers to understand what a good pension scheme looks like and whether that would work for their employees. But we also hope that we can provide employers at the lower end of the market with fairly strong signals about how they can differentiate schemes that are suitable and schemes that are not suitable for their employees.”
The National Association of Pension Funds says the latest round of QE will further increase pressure on defined-benefit scheme funding.
It estimates the last round of QE, when the BoE pumped £75bn into the economy, increased DB deficits by around £45bn.
NAPF chief executive Joanne Segars says: “For the companies that run final-salary pensions, QE is a headache which pushes their pension funds further into the red. This means businesses have to put more money into their pension schemes instead of spending it on jobs and investment. Our fear is that firms struggling with a weak economy will simply choose to close their pension schemes.”