Clarity welcomed but gilt stance disappointing: the industry view
Rachel Dalton examines the industry response to the guidance.
The industry reacted positively to the clarity that the regulator’s guidance provided.
Head of UK Pensions at Towers Watson John Ball says TPR has recognised that paying off deficits is not a straightforward affair.
“The regulator’s acknowledgement that paying as much as possible into the pension scheme is not always the best thing for benefit security will help trustees continue to take a pragmatic approach where alternative uses for the money can be good for the sponsor’s covenant,” says Ball.
Hymans Robertson partner Clive Fortes says the statement sends a “rebuke” to companies that are choosing not to pay more into their schemes when they can afford to.
PwC pensions partner Jeremy May adds: “Scheme valuations need to look beyond market values and funding contributions. “TPR’s stance seems to recognise the role luck plays in the timing of scheme valuations.”
National Association of Pension Funds chief executive Joanne Segars says: “It is good that the regulator will allow extensions in recovery periods and allow recovery plans to take on board any potential improvements in economic conditions.”
Confederation of British Industry director for employment and skills Neil Carberry says: “TPR’s assurance that the majority of schemes will not have to change their existing funding plans will reassure trustees they should focus on the long-term health of the scheme.”
However, both Segars and Carberry agree the regulator’s stance on gilt yields and QE is disappointing.
“The BoE’s QE programme has exposed a fundamental problem with the way pension scheme funding is calculated, which the regulator fails to address,” says Carberry.
“[QE] has made pension scheme deficits look artificially big by lowering gilt yields.
“While TPR acknowledges this, its advice to trustees fails to deal with the problem of how the amount required to cover a scheme’s liabilities is calculated.”
Others used the publication of the guidance to bring up wider concerns with the way scheme valuations are done.
ACA chairman Stuart Southall says: “Where this statement perhaps goes further is in stressing the view that ‘any increase in the asset outperformance assumed in the discount rate to reflect perceived market conditions [must be seen] as an increase in the reliance on the employer’s covenant’.
“This may not be a conclusion accepted by all stakeholders and this could create some tensions and difficulties.”
Punter Southall chief executive John Batting says: “Trustees and employers should have access to the most up-to-date information so they are better able to navigate their way and are more likely to plot a sensible course to meet their long-term objectives.
“This questions the traditional triennial valuation. The natural solution is to monitor actively the financial position of pension schemes more regularly to ensure [employers] can efficiently navigate through these turbulent economic times and effectively account for any ‘post valuation experience’.”
Some commentators outline how schemes can apply the guidance to their funding plans. Stephenson Harwood partner Fraser Sparks says: "In the current environment, perhaps there is an argument that the trustees should move away from looking at gilts and simply take a prudent view of what investment returns they expect to achieve going forwards, particularly if they do not hold significant assets in gilts any more and are not looking to secure benefits with an insurance company in the short to medium term."
Schroders head of UK strategic solutions Jonathan Smith says: “TPR emphasises that any risk in the pension scheme must be supported by the sponsor’s covenant. For schemes with weaker covenants this means thinking carefully about the types of risks they are taking, be they rewarded or unrewarded, and potentially using a wider range of tools to manage risk and generate return.”
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