Hugh Nolan ponders the consequence of TPR being required to have a regard for the growth prospect of employers, as announced in the Budget

It wasn’t in the headlines, but tucked away in this year’s Budget statement was a hint of relief for employers struggling with the millstone of seemingly ever-growing pension fund deficits. Low interest rates may be good for borrowers but not when that debt is a deficit in a pension scheme. Low gilt yields mean big pension deficits. The massive contributions already being paid by UK plc to fund the last calculation of pension deficits are making little difference. Anecdotal evidence suggests employers are unable or unwilling to invest in growing the business due to concerns over pension scheme deficits. As a result the government is ‘on the case’.

The Pensions Regulator has repeatedly stressed that the regulations already give lots of flexibility in the funding of pension deficits. But this seems aimed more at options for lengthening recovery plans rather than any flexibility on the quantum of the pension deficit.

Facing up to the reality of big pension deficits may make sense to those worried about protecting the security of members’ benefits but is deeply frustrating for those employers who believe that the pension deficit is a short term ‘blip’ caused by government manipulation of gilt markets. They see big pension deficits as misleading and dangerous. This is particularly true of schemes where the principal employer is controlled by an overseas parent company with limited knowledge of the UK pensions environment. A high headline deficit can have serious implications for the employer’s intentions and support for the scheme and its members. An overseas parent is likely to be even more worried and unsure how to react, creating suspicion and mistrust.

Into this situation comes an unlikely hero - George Osborne. In his Budget statement, the chancellor said he is “giving The Pensions Regulator a new requirement to have a regard for the growth prospects of employers”. This excellent idea is certainly better than the valuation ‘smoothing’ previously suggested but what does it mean in practice?

Given the pressure from the European Insurance and Occupational Pension Authority (EIOPA) on prudent reserving in pension schemes (the possibility of a new solvency directive still exists) it seems unlikely that there will be too much relaxing in the calculation of pensions deficits but there is hope for cash funding demands on hard pressed employers. The regulator will rightly say that affordability of contributions is already a fundamental part of the valuation process and will doubtless have some regard to the new objective even before it is specified precisely and laid before parliament.

Michael O’Higgins said in his response to the Budget announcement in his role as chairman of The Pensions Regulator, “we regulate according to the legislative framework set by government and parliament”. That seems eminently fair - it is hard to expect the regulator to do anything else. Mr Osborne has now simply widened the remit of the regulator to include consideration of the prospects for corporate growth.

I see an uncertain few months as all stakeholders ponder the possible implications of the new objective. Some employers may be resistant to agreeing new schedules of contributions if they think they may be given more flexibility later and some trustees may feel they have lost some leverage in negotiations.

Sadly many employers in difficulties with large pension deficits are also struggling to grow their business in a difficult economic environment and not all employers have large stocks of cheese they can use to avoid cash demands from trustees. So, whilst the government’s initiative will be welcomed by some employers who may be able to defer cash funding of pension deficits, I doubt if there will be any radical change to the patterns of pension funding.

Hugh Nolan, executive director, JLT Benefit Solutions

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