UK - Target funding levels proposed under the Pension Regulator's new regime pose a "significant problem" for companies and trustees, argues Hewitt Associates.
The Regulator must provide flexibility in the new funding benchmark and deliver on its promise to “take the issue of affordability very seriously” or companies will struggle to make profits, the consultant said.
The Regulator intends to investigate a pension scheme funding plan when either; the target fund is below 70% to 80% of the buy-out cost - reckoned to be broadly equivalent to 100% of the liabilities on an FRS 17 accounting basis; or the period for eliminating deficits exceeds 10 years.
Of the two trigger points indicated by the Regulator, a majority of the 80 clients surveyed by Hewitt expressed some difficulty with the proposed target funding level.
Some 81% of respondents said that as a result they will need to change their approach to funding and 61% said that the Regulator's minimum target funding level of around 100% of the liabilities on an FRS17 accounting basis would present them with a “significant problem”.
Hewitt are concerned many schemes are significantly below their own current targets, regardless of the one now being indicated by the Regulator, meaning some schemes with vast deficits but low profitability will struggle to cope.
“If the regulator starts getting aggressive and asking for much and even if people can pay it might have a significant effect on those companies ability to generate profits in the future,” commented Graham Everness at Hewitt.
“The worst case scenario is that if they are not flexible enough they would slow down opportunities for growth and the economy in general. If people go bust then the regulator hasn’t been exercising the flexibility they said they would.”
Richard Mulcahy at Hewitt added: While a majority of those surveyed seemed less concerned by the proposed deficit recovery period, the loudest objection may come from larger companies who feel that shorter recovery periods may restrict corporate activity and ultimately jeopardise shareholder value.
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The Pensions Regulator (TPR) has exercised its production order power under the Proceeds of Crime Act 2002 for the very first time as part of a fraud investigation.
The ITN Limited Pension Scheme has named Trafalgar House as its administrator for an initial term of five years.