The Pensions Regulator (TPR) has published its annual funding statement for 2013, placing greater emphasis on the flexibilities open to pension schemes grappling with low gilt yields from the weak economy and quantitative easing (QE).

The defined benefit annual funding statement primarily aimed at those undertaking valuations with effective dates in the period of 22 September 2012 to 21 September 2013, accentuated that trustees can use the flexibility available in setting the discount rate to calculate future liabilities based on the yield held by assets of the scheme and/or the yield on government or high quality bonds to best fit their circumstances.

Concerning contribution levels and recovery plans, the statement mentioned that trustees should consider the financial strength of the employer before announcing increases in deficit repayment contributions. The statement read: “For some employers it may be reasonable to make increases, perhaps as a result of improvements in business performance, without damaging any future plans that grow the covenant to the scheme. Others may find that they are unable to do so.”

The regulator also announced that it is to move away from setting triggers focused on individual items such as technical provisions and will continue to evolve its range of risk indicators as part of the filter mechanism. These will include specific issues and concerns relating to deterioration in sponsor covenant strength or possible avoidance, the shape of recovery plans including the initial low level of contributions, the investment performance assumed over the life of the recovery plan and any significant issues with previous valuation submissions.

The regulator’s chair Michael O’Higgins commented: “I want to see pension trustees agree long-term strategies with employers that protect the interest of retirement savers, whilst also enabling viable businesses to thrive and grow. We expect them to mitigate the risks to their scheme, but this does not require them to be overly prudent.

“As our analysis shows, circumstances differ greatly between schemes. Many are in a relatively strong position and our starting point will be that schemes should consider whether to maintain present levels of deficit contributions as agreed as the last valuation."

NAPF chief executive Joanne Segars said: “The statement has shifted away from last year’s heavy bias on basing investment return assumptions on risk-free assets and gilts, and instead recognises that pension funds are confronting some major challenges, and that a broader view is needed. Many businesses going through their valuations in 2013 are facing much tougher conditions than they did three years ago, so they will be encouraged by this sign of support. However it is one thing to talk about flexibility and another to allow it to be used. The regulator must stand by its signals. We are encouraged by this latest statement and the signs so far of a change in the regulator’s approach.”

PwC head of pensions advisory Raj Mody added: ""In our experience, the potential flexibility is not being used as much as it could be. For example, modernising the approach to setting assumptions for discount rates and inflation could easily help reduce overly-prudent deficit assessments by over £100bn across UK plc's defined benefit pension schemes. The cash otherwise available and not prematurely tied in up pension funds could instead be deployed by companies to strengthen their businesses and so the economy. This in turn will be good for pension sponsors, trustees and members alike."

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