The Pensions Regulator has told defined benefit pension schemes to ‘do more’ to tackle increased deficits to reduce risk to pensioners.

The comments follow analysis of schemes undertaking valuations between 22 September 2016 and 21 September 2017, known as tranche 12 schemes. The data reveals how challenging market conditions have led to a jump in deficits and lower funding levels for certain DB schemes.

It suggests the majority of DB schemes are supported by employers that can manage deficits, but also highlights the impact of current conditions on the ability of sponsors to maintain and increase deficit repair contributions (DRCs). It also shows that the ratio of DRCs to dividend payments by sponsoring employers has declined.

However, the analysis does note that many of the schemes experienced relatively favourable market conditions at their last valuations in 2014, and therefore will have been more significantly impacted by current market conditions than schemes in earlier tranches. Although asset returns have been better than expected, generally this has not been enough to offset the increase in liabilities due to the change in market conditions, meaning overall deficits have increased and funding levels have fallen.

Despite this, the regulator is positive, and expects around 50 per cent of tranche schemes to have the resilience to maintain the same pace of funding and many will be able to increase their contributions if the circumstances of the scheme require it. A further 37 per cent of schemes have an employer covenant which TPR considers adequate to support the scheme but their current contribution and/or risk strategies pose unnecessary longer term risks. This risk may be addressed by increased funding now combined, for some schemes, with a reduction in the level of risk.

Commenting, TPR executive director for regulatory policy Andrew Warwick-Thompson said: “It is encouraging that 85 to 90 per cent of schemes currently preparing their valuations have employers with sufficient financial resilience to be able to afford to manage their deficits, and don’t have a long term sustainability challenge. But it is clear that tough market conditions have led to a significant jump in deficits for this tranche of schemes despite their relatively stronger position three years ago.

“Ensuring DB schemes are properly funded is a key priority for us and so our annual funding statement this year takes a more directive approach than in previous years. We have been clear in what our expectations are; where we expect higher contributions into a scheme, and where we expect a scheme to reduce risk to an appropriate level and / or to seek legally enforceable support from its group or parent company. We also want more schemes and sponsors to make use of the flexibilities within the funding framework.

“It is disappointing to see that the ratio of DRCs to dividends has declined from around 10 per cent to around 7 per cent. We are not against companies paying out dividends but employers must strike the right balance between the interests of the scheme and that of its shareholders. Having made our expectations so clear in this year’s AFS, if we see a situation where we believe a scheme is not being treated fairly, we are likely to intervene. For example, if a company is paying out more in dividends than in deficit reduction contributions, we will expect to see a short recovery plan. And we will expect that recovery plan to be underpinned by an appropriate investment strategy.”

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