The Pensions Regulator

Prudent funding targets are key to the health of pension schemes

Ref: PN09-07
23 June 2009

Embargo until 12:00 (Noon) 23 June 2009

The Pensions Regulator today publishes a statement emphasising the importance of prudent funding levels for pension schemes and stating that where sponsors are in difficulty, flexibility is available in recovery plans.

Following a series of nationwide funding workshops, the regulator is setting out its approach to scheme funding valuations and the importance of the employer covenant through the economic downturn.

This message is reinforced with a series of online case studies that provide further insight into the important task of setting funding targets and agreeing recovery plans. A webcast of the funding workshops will also be posted on the regulator's website.

Chair of the Pensions Regulator, David Norgrove, 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.”

The key points in today's statement 'Scheme funding and the employer covenant - prudence, affordability, applying flexibility through the economic cycle' are:

• Economic and financial conditions have resulted in cash constraints for many employers in the short term, and for some, greater uncertainty about longer term prospects;
• The current regulatory framework and approach to scheme funding is sufficiently flexible to cope with these conditions;
• Technical provisions are the scheme-specific funding standard which pension schemes must target and the regulator's requirement is that they are set prudently; there is flexibility in setting a recovery plan to repair a deficit to meet the funding objective;
• At the current time, FRS17 is unlikely to represent an adequate level of prudence without further adjustment;
• Any risk margin in the assumptions for setting Technical Provisions must take account of the extent to which the employer covenant can support them;
• Technical provisions should not be compromised to make a recovery plan appear affordable; the size of the deficit does not necessarily dictate annual deficit repair contributions to the pension scheme, these must be determined with reference to what is reasonably affordable for the employer.

Sourced from examples in the Orange Book publication, 'An analysis of recovery plans and clearance applications', case studies offer schemes and employers an in-depth view of when and how the regulator may become involved with the funding process.

The statement, 'Scheme funding and the employer covenant - prudence, affordability, applying flexibility through the economic cycle', can be viewed in full here: http://www.thepensionsregulator.gov.uk/pdf/
EmployerCovenantStatementJune2009.pdf

The case studies can be viewed in full here: http://www.thepensionsregulator.gov.uk/guidance/
schemeFunding/fundingCaseStudies.aspx

Editor's notes

1. This news release is under embargo until 12:00 (Noon) 23 June 2009
2. The Pensions Regulator is the regulator of work-based pension schemes in the UK, with objectives to protect members' benefits, promote good administration and reduce the risk of calls on the Pension Protection Fund. Our approach is risk-based focusing on education and enablement, with enforcement where appropriate. We have the ability to: 

• collect information about pension schemes; through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
• issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
• direct pension schemes as to how to calculate their liabilities and the contributions required;
• issue a contribution notice where there is a deliberate attempt to avoid liabilities, or a financial  support direction where the employer is a service company or insufficiently resourced.