The Pensions Regulator has issued details of its new approach, and industry guidance for consultation, on the funding and risk management of defined benefit pension schemes. This follows the Government's desire to ensure that the Regulator's actions minimise any adverse impact on the sustainable growth of an employer.
Raj Mody, pensions partner at PwC, said:
"The Regulator has set out how it will ensure its actions do not adversely impact the sustainable growth of companies which sponsor UK pension schemes. The new policy basically boils down to three elements - a more transparent and contemporary approach from the Regulator around its focus and key principles; a requirement for trustees to be balanced in their decision-making, including not unreasonably impacting on the employer's sustainable growth plans; and an expectation that employers will work collaboratively with trustees so decisions can be made in a connected and consistent way.
"With the Pensions Regulator's focus on schemes having timely and joined-up information, and the need to carry out sensitivity analysis, we see Skyval as the industry standard way for pension trustees and sponsors to access the analytics required to manage their pension scheme."
Paul Kitson, partner and scheme funding adviser in PwC’s pensions team, said:
“The proposals are a big step in the right direction. Abandoning previous triggers for pension scheme funding such as whether deficit repair periods were shorter or longer than arbitrary targets, and instead encouraging a joined-up approach to investment, covenant and funding, will really help pension schemes to set more appropriate and long-term funding plan. It will also allow a more efficient approach to their asset investment strategies.
“This will be a huge change for many pension schemes. Research from our recent survey representing over £200bn of pension liabilities shows only a third of pension schemes currently have a formal strategy which brings covenant, funding and investment strategy together. Employers and trustees are typically actively assessing the risk in all of these areas, but this often happens in isolation."
Jonathon Land, head of PwC’s pensions credit advisory team, said:
“A joined-up approach to investment, funding and covenant is a step forward in promoting better pension scheme governance and will help to reduce the risks defined benefit schemes pose to companies.
“An integrated approach will allow strategic decisions to be made based on the level of risk a scheme’s employer covenant can support. This approach considered alongside the level of contributions an employer can afford and sustainable investment in the long term future of the company will lead to a more balanced approach to deficit funding. Other benefits could include a more collaborative approach between employers and trustees, and better alignment with a company’s future business plans."
PwC has recently launched a new service to help pension scheme trustees and sponsors meet the Pensions Regulator's expectations for an integrated approach. "ORCA" - which stands for Objectives, Risks, Cash and Actions - steers trustees through a consistent series of decisions to help them join up their objectives and actions on financing and risk management in a customised way, and saves having to create frameworks from scratch. It can equally be deployed by sponsoring company management to articulate their expectations on these fronts in a way which trustees will understand and be able to implement.
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