UK Pension Regulator’s guidance for trustees marks significant change
Acknowledges damaging effects of QE and low rates on employers’ pensions
Regulator tells trustees to allow employers more time and maybe accept lower contributions for recovery plans
Supports Government focus on private sector investment and growth
by Dr. Ros Altmann
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The UK Pensions Regulator has just released its latest annual guidance for defined benefit pension fund trustees. The wording of this guidance has a noticeably different tone from last year. The Regulator is clearly encouraging trustees to be more lenient in their dealings with sponsoring employers, following concerns that employers are being forced to put more money into their pension schemes at the expense of the company’s future growth.
In his March Budget, the Chancellor signalled that the Government wants to prioritise private sector investment and growth. It thus wants employers to invest in their businesses, rather than putting money into their pension schemes right now. The Regulator has thus shifted its focus towards encouraging trustees to tolerate longer recovery periods and lower contributions in the short term if that means the employer can invest for longer-term business growth.
The Pensions Regulator is going to be given a new statutory objective to ensure that scheme funding demands take the employer’s interests into consideration as well as those of members and the Pension Protection Fund. The wording of this new objective is not yet published but the latest guidance from the Regulator clearly indicates a relaxation of its approach to scheme deficit recovery.
Although the UK pensions regime already contains plenty of flexibility for trustees to use their discretion in setting contribution rates, the Regulator has not given enough clarity in its past guidance for trustees to be confident to use the flexibilities. The new guidance makes the situation much clearer.
The following quotes from the document highlight the new tone:
“trustees may need to make greater use of the flexibilities available than needed for their preceding valuations.”
“In setting contribution levels trustees should take into account what is reasonably affordable for the employer.”
“Where there are significant affordability issues trustees may need to consider whether it is appropriate to agree lower contributions and this may also include a longer recovery plan.”
“A strong and ongoing employer alongside an appropriate funding plan is the best support for a scheme.”
Of course, the trustees also need to make sure employers do not just stop funding their pension obligations and pay out money to other creditors instead, so it will be important for the trustees to assess carefully what the employer plans to do with its resources. As the Guidance says:
“Where there is tension between the need for scheme contributions and for investment in the employer’s business, it is important that the solution found neither damages the employer’s covenant nor benefits other stakeholders at the expense of the scheme.”
It is welcome that the Regulator is encouraging trustees to be more pragmatic and tolerant in the current exceptional circumstances. It would be a real shame if UK business performance was damaged because of low rates that are supposed to stimulate growth.
Bank of England policies have driven interest rates down to unprecedentedly low levels. UK pension scheme liabilities are discounted by government bond yields and, as QE has forced gilt yields down, the liabilities – and scheme deficits – have soared. Trustees and their actuarial advisers use long gilt yields as the benchmark for calculating the present value of their liabilities and this determines the contributions they demand from employers to support the scheme. As interest rates have fallen, scheme deficits have risen and trustees have had to ask for more money from employers. Some companies have already failed as a result of being unable to support their scheme deficits and many others have found the drain of the pension scheme has diverted money from investment and job creation, or hampered their ability to access credit, or has damaged stock market performance. This is also harming UK growth, which is of concern to the Government.
Allowing employers more leeway to wait for a better time to make up pension shortfalls and strengthen their business in the meantime is eminently sensible.
Dr. Ros Altmann
8 May 2013