The Pensions Regulator wants trustees of defined benefit schemes to consider the impact setting high deficit repayment contributions could have on the financial strength of the sponsoring employer.
Trustees of DB schemes with a funding gap – that is where the value of a scheme’s liabilities is greater than the value of its assets – are required to set annual employer contributions designed to repair the deficit over a set period of time.
TPR has published a statement today setting out acceptable approaches to valuing and paying off pension deficits.
The regulator urges trustees to take into account what is “reasonably affordable” for the employer when setting deficit recovery plans.
It says: “In setting contribution levels trustees should take into account what is reasonably affordable for the employer. This will be an employer-specific assessment and our analysis highlights that there is a wide variety in employers’ circumstances.
“As a starting point, trustees should consider whether the current level of contributions can be maintained. For some employers it may be reasonable to make increases, perhaps as a result of improvements in business performance, without damaging any future plans that grow the covenant to the scheme. Others may find that they are unable to do so.
“Where there are significant affordability issues trustees may need to consider whether it is appropriate to agree lower contributions and this may also include a longer recovery plan.
“Trustees should ensure that they document the reasons for any change and indicate that they have had due consideration of the risks.”
The statement follows an announcement from the Government in the March Budget that it plans to give TPR a new statutory objective to “support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer”.
The regulator says the precise wording of the new objective will not become clear until later in 2013 and is subject to parliamentary process.
National Association of Pension Funds chief executive Joanne Segars says: “Many businesses going through their valuations in 2013 are facing much tougher conditions than they did three years ago, so they will be encouraged by this sign of support.
“However, it is one thing to talk about flexibility and another to allow it to be used. The regulator must stand by its signals.
“We are encouraged by this latest statement and the signs so far of a change in the regulator’s approach.”
Confederation of British Industry chief policy director Katja Hall says: “It is good to see that The Pensions Regulator has already started taking into account its new economic objective.
“The CBI has been clear for some time now that the best protection for member benefits in the long run is a thriving employer.”