Pensions - Articles - Mercer welcomes removal of 15 year rule for pension deficits

 According to Simon Turner, Principal in Mercer’s Utilities specialty group, “In the current low gilt yield environment, we expect that many NWOs deficit recovery plans will need to be extended beyond the original 15 year period. Ofgem’s suggestion to remove the fixed end date for funding historic pension deficits is both pragmatic and sensible and it is encouraging to see the Pensions Regulator’s comments that its objectives can be compatible with this. Importantly, Ofgem have highlighted the need for NWOs to explain to trustees how the protections in licence conditions and Ofgem’s funding commitment provide strong employer covenants.

 We can still see opportunities for shorter recovery periods being acceptable to Ofgem but these would need to account for consumer interests.”

 “We support the emphasis that Ofgem now places on the relationship between companies, trustees and consumers. This allows more flexibility over cash deficit payments and helps the long term sustainability of defined benefit pension schemes across the sector. The removal of the original end date for funding established deficits has moved the goal posts for NWOs and presents new opportunities. It’s a chance for a “blank canvas” review of funding and investment plans.”

 Mercer believes there are clear next steps for NWOs which should include carrying out a strategic review of their pension arrangements to assess the opportunities and risks arising from the consultation. Those heading into deficit contribution negotiation with trustees for 2016 valuations should have a clear understanding of their starting point. NWOs, with their very special circumstances, will also need to assess all benefit change and liability management options in good time for Ofgem’s next review of pension costs.