 The Pensions Regulator has today published evidence ( which can be viewed here) of how some of the flexibilities in the defined benefit funding regime have been used by pension schemes and sponsoring employers.
We are also publishing our analysis of the contributions required to keep schemes largely on track to previously agreed recovery plans. We have compared this with a number of measures for the affordability for employers of defined benefit (DB) pension promises to understand the impact of these changes. This analysis supports the regulator’s Pension scheme funding in the current economic environment statement published earlier this year, designed to assist the third of schemes carrying out their valuations in the current cycle.
The regulator’s executive director of DB regulation, Stephen Soper, said:
“Pension liabilities pose a significant challenge for pension trustees and sponsoring employers in the current economic climate.
“Most schemes will be able to continue with previously agreed plans, or will need to make only slight adjustments. But others will find it extremely tough and will need to make maximum use of the flexibility the system affords. We’re working proactively with schemes to understand how we find a way through these difficult cases.
“We believe that the right balance is being struck, in our approach to the DB funding regime, between protecting retirement savers, protecting the PPF and maintaining employer viability. But we want that judgement to be understood, which is why we have today published our analysis.”
The analysis sets out that the funding framework is flexible enough to take into account the circumstances of individual schemes and employers:
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Contributions as a percentage of liabilities (‘technical provisions’) vary significantly from scheme to scheme.
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Discount rates used by trustees vary significantly – assumptions for investment outperformance relative to gilts have varied from below zero to over 200 basis points.
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Recovery plans for schemes in the current cycle increased by about 4.7 years in their last round of valuations three years ago. Recovery plans are assumed to increase on average by three years this time around, meaning an aggregate increase of 7.7 years since 2009.
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Use of guarantees, security and contingent assets in place of cash contributions has increased seven-fold since 2006 to 2007.
In producing its scheme funding statement earlier this year, the regulator considered how best to achieve the right balance regulating appropriate funding, in particular giving due account to affordability for employers.
Starting with the assumption that sponsors would wish to maintain the level of contributions already committed to in recovery plans, the regulator analysed what impact this would have on them and whether they would need to make use of the flexibilities available in the DB funding regime.
Based upon this the regulator concluded that:
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About 25% of schemes would not need to amend their recovery plans.
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About 30% of schemes would remain on track to meet their long-term liabilities with a three-year extension to their existing recovery plan and 10% increase in contributions.
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About 20% of schemes could remain on track with a three-year extension to their existing recovery plan, a 10% increase in contributions and making use of further flexibilities in the funding regime, such as allowing for greater investment outperformance in their recovery plan.
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About 25% of schemes would need to make maximum use of the flexibilities available in the funding framework because of the affordability challenges for their sponsoring employers.
The analysis shows that for more than half of FTSE350 sponsors in the sample, deficit recovery contributions (DRCs) represent less than 20% of the money distributed in share dividends. At the other end of the scale, for about 15% of FTSE350 schemes, DRCs are higher than 50% of current dividend payments.
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