Introducing a ‘comply or explain’ regime to scheme recovery plans, with a recovery length of 10 years, would help bring down scheme recovery lengths, according to the Pension Protection Fund.
Giving evidence at the Work and Pensions Committee hearing on the defined benefit white paper, Pension Protection Fund chief executive Oliver Morley said that a ‘comply or explain’ regime is his focus and 10 years for a recovery length plan seems to be rational point to set.
“We would have concerns about the sudden move to nine years on recovery plans and we would be concerned about an adjustment in terms of the risk on the investment side. But we do believe there is a benefit in having a mark at which you set comply or explain that gives some ability for the regulator to be able to review schemes at some scale. We do believe that making sure that comply or explain is an obligation is an important part of a possible legislative framework in the future,” he said.
In addition, Morley noted that there will be some schemes that would have a legitimate explanation as to why they would not be able to comply with the 10-year point, but it would not be common.
Also giving evidence was Pension Protection Fund chief customer officer Sara Protheroe who believes that a ‘comply or explain’ regime could help bring down the length of scheme recovery plans.
The hearing’s other panel of witnesses was largely supportive of the PPF’s proposal to set the maximum recovery period for a scheme deficit at 10 years. However Association of Consulting Actuaries chair Bob Scott said that if you impose a recovery plan of a certain length, it could introduce more risk into the system.
“For a scheme looking to meet a low risk funding target, say over a period of 16 years, might actually be a better outcome for the scheme in terms of higher contributions and lower risk, than saying you have to have a recovery plan less than 10 years, so let’s meet a higher risk funding target with greater investment risk over eight years, so again I think it needs to be scheme specific,” he explained.
However, Baroness Drake said that she thinks 10 years is too long as you “run the risk that the 10 becomes normative and you drift out”. She said that a ‘comply and explain’ regime is good as long as there is rigour around the explanations for those who are not complying.
When asked whether the number of schemes that have a recovery plan of over 10 years (1,000+) is too high the panel were mostly in agreement, but Squire Patton Boggs partner Helen Miles said it was “subjective” and if trustees feel it’s appropriate then it is not too much.