The Pensions Regulator has today published its first annual funding statement to provide guidance on how DB schemes should approach their funding valuations.

Although relevant to all trustees and employers with a DB pension scheme, this statement is aimed at those who are undertaking their scheme valuations with effective dates in the period September 2011 to September 2012. It therefore applies to about a third of the UK’s 6,500 DB schemes and about 4 million of the 12 million DB members.

TPR’s chief executive Bill Galvin said: “Pension schemes are long-term undertakings. A resilient economy and a healthy sponsoring employer provide the best environment for delivering pension promises. The economic climate continues to be challenging, but the majority of schemes and sponsoring employers should be able to meet their promises to members without major adjustments to their current plans. Trustees must produce credible recovery plans in light of all the risks, including employer insolvency.”

Galvin explained that employers that are struggling have greater breathing space to fill deficits over a longer period, although he added that the regulator distinguishes between this group and those cases where schemes are substantially underfunded and employers are able to afford higher contributions. For the latter cases, TPR will expect trustees to take steps to put their scheme in a better position.

The statement gives schemes and employers flexibility to meet their long-term liabilities, including, where necessary, filling deficits over longer periods, taking account of improvements to market conditions post-valuation, and the use of contingent security and intra-group guarantees.

As a starting point, current deficit recovery contributions should be maintained in real terms, and that, where a reduction is proposed, the regulator will seek strong justification.

Further guidance was also given on the employer covenant. TPR said that in some cases dividend payments may need to recognise the shareholders’ subordinate position to the scheme, and that, where available cash is used within a business that might otherwise have been used to increase contributions, it should have the demonstrable effect of strengthening the employer covenant.

Based on the information they hold on schemes, TPR estimates that a majority of employers of schemes in deficit will not need to make changes, or very small changes, to their existing plans.

Employers with significantly underfunded schemes who can afford higher contributions will be expected to increase contributions and/or provide security in the form of contingent assets. Employers with deficits who cannot afford higher contributions are likely to need to extend their existing deficit recovery plan length and/or make full use of the other flexibilities within the scheme funding framework.

The regulator also dismissed calls to allow schemes to make an allowance for low gilt yields and the effect of quantitative easing in the assumptions they use, stating that it is not a prudent approach as it seeks to second guess future market conditions.

The regulator’s executive director for DB regulation Stephen Soper added: “We are taking a more segmented approach to regulation and will proactively engage with those schemes where we believe there is greatest risk to member benefits and PPF levy payers, based upon experiences of previous funding cycles.

"Schemes in a stronger position can expect less intervention by us, but we will place more focus on schemes in a weaker position. In those rare situations where the sponsoring employer is so weak that trustees are not able to put together a viable plan, we urge them to contact us as early as possible in the process."

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