The Pensions Regulator (TPR) should allow trustees greater flexibility over decisions on how to fund pension schemes, Mercer stated in its response to the government’s consultation report, Pensions and Growth.

The Department for Work and Pensions (DWP) issued a call for evidence in January on whether to smooth assets and liabilities in scheme funding valuations and whether to introduce a new statutory objective for TPR.

Responding to this, Mercer told the DWP that smoothing is likely to impose a “narrower rules-based approach on trustees”. Instead, the government and regulator should take a wider view on how the statutory funding regime should be regulated in a way that encourages companies to continue to support defined benefit (DB) schemes over the long-term.

It said that changing the statutory funding regime to introduce smoothed measures of liabilities and assets is “unlikely to materially reduce the pressure on employers sponsoring DB schemes”.

It also added that it is concerned that “some trustees might find it difficult to strike the right balance between strengthening funding and reliance on employer covenant as a consequence of the regulator’s messaging on risk”, stating that a trustee’s focus on increased contributions to pension schemes and de-risked investment strategies “is not necessarily the appropriate response to TPR’s statutory objectives”.

A partner at Mercer Deborah Cooper said: “Now that TPR has had time to raise both behavioural and financial standards, the way it implements its ‘corporate objectives’ should be reviewed.

“Rather than introduce a new objective, it would be more productive to provide clarity around how the regulator’s existing objectives should be interpreted and to be clear about the success measures.

“Following a strategy that supports continued employer solvency, including measuring the affordability of contributions in the context of other demands on the employer’s discretionary spend, is already implicit in the regulator’s statutory objectives. As the call for evidence notes, solvent employers are key to member security, so it would seem impossible for the regulator to ignore this.”

In addition, Mercer highlighted in its consultation response that the existing regulatory regime for funding defined benefit (DB) pension schemes “remains fit for purpose” provided the TPR reviews its regulatory stance in three main areas.

These included providing affirmation that its statutory objectives require it to take a sponsor’s financial position and ongoing solvency into account when setting its regulatory policy; rebalancing its treatment of the interests of sponsoring employers and trustees so that trustees have the necessary flexibility to adapt to the challenges faced by the employer and pension scheme; and reconsidering its statements on the level of risk it believes the system can maintain, so that it is clear that trustees can agree with employers to fund schemes without targeting winding up – or an equivalent measure.

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