Guidance issued by The Pensions Regulator last Friday sends a clear message that it will be flexible when dealing with employers that are unable to fund scheme deficits through cash contributions, says the watchdog.
Executive director for defined benefit regulation Steven Soper told PP the guidance on funding valuations was designed to avert problems for approximately 300 schemes that were in particularly difficult circumstances.
“For those that cannot afford [to fund their deficit] we have tried to create some understanding about what would be acceptable variations in order to assist these schemes and employers through a fairly difficult set of circumstances,” he says.
Soper says TPR is bringing its guidance together to reduce uncertainty and try to engage schemes earlier in the valuation cycle.
He adds: “It happens to have coincided with a period of economic turmoil, but the real drive from the regulator here was to get involved in the more difficult cases earlier.
“We have been clearer that for employers where cash contributions are a particular difficulty we are prepared to be reasonably creative around contingent assets, escrow funds or special purpose vehicles.”
TPR issued guidance on contingent asset contributions at the beginning of last year.
Soper continues: “We are also trying to bring into sharp relief that for the very small number of schemes where there really is not a viable route to fulfilling these member promises we are prepared to work with them to bring things to a conclusion because otherwise the Pension Protection Fund is just picking up all the downside.”
Soper says the regulator will publish a report into the BMI deal announced this month in due course (PP Online, 19 April).
He explains: “Where the proposal is that the scheme continues with the cover of the PPF, but the employer is in any way restricting or capping their liability, we are extremely unlikely to sign off plans. In the BMI case it was relying particularly on high asset-performance.”
He says schemes will be able to make assumptions in recovery plans that asset performance would pick up, as long as they can mitigate against these assumptions not coming to fruition.
“But mark-to-market is sacrosanct,” he says. “We want people to be honest about what the current position is, but we are happy that they make adaptations for expectations within the recovery plan.”
In Brief: The Pensions Regulator’s guidance
TPR has published updated guidance on how trustees and employers should approach funding valuations in challenging economic times.
• Schemes are not permitted to smooth the discount rate applied to liabilities to mitigate the extremely low gilt yields at present;
• Companies in financial difficulty could be given more time to plug the deficits;
• Employers that are underfunding schemes or cutting back recovery plans where affordability is not an issue will face scrutiny
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