UK - The UK Pensions Regulator (TPR) has outlined how it will account for increased deficits within UK defined benefit schemes in the wake of quantitative easing (QE), stressing it will monitor whether the flexibility granted in negotiating funding proposals has been used “appropriately”.
The regulator’s chief executive Bill Galvin said that while the economic environment continued to be “challenging”, the majority of sponsors would be able to fulfil pensions promises without adjusting existing funding proposals.
He added that struggling employers would have “greater breathing space” to address deficits over a longer period, with the changes impacting any valuation conducted within 12 months of September last year.
“However,” he warned, “we will draw a distinction between this group and those cases where schemes are substantially underfunded and employers are able to afford higher contributions.
“In such cases, we will expect pension trustees to be taking steps to put their scheme on a more stable footing.”
The concession comes after the Bank of England re-launched its asset purchase programme last autumn, announcing a further £75bn (€92bn) stimulus package, with the gilt buy-back rising by a further £50bn since.
At the time, the National Association of Pension Funds called for an “urgent” meeting with the regulator on how the increased deficits would be accounted for in funding proposals, with its most recent estimates saying the entirety of the £325bn stimulus increased liabilities by £270bn.
The guidance stresses that deficit recovery payments must be maintained in real terms. But it also noted that many schemes would still be “broadly on track” for recovery, due in part to the fall in liabilities resulting from the adoption of the consumer prices index to measure inflation.
The regulator warned, however, that it would not tolerate money being diverted away from deficit repayments if a company could not demonstrate how the alternative uses were strengthening the employer covenant.
“In some cases, dividend payments may need to recognise the shareholders’ subordinate position to the scheme,” it said.
“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.”
National Association of Pension Funds chief executive Joanne Segars said it was good that the regulator would look “sympathetically” on employers, but urged the regulator to be prepared for the possibility of further QE.
“Whilst the Regulator is optimistic that the majority of pension schemes will not need to make significant increases in their contributions, it will need to stand ready to adjust its expectations if the real experience of pension schemes turns out to be far worse,” she said.
Employer lobby group CBI said the statement provided “useful clarity” for sponsors, but added that QE had exposed a “fundamental problem” in the way liabilities are calculated.
Neil Carberry, director of employment, said the regulator had so far failed to address these concerns.
“To help the private sector provide both the growth we need and the pensions firms have promised to employees, the current method of valuing a pension fund must change,” he said.
“It cannot be right that pension schemes with very long-term liabilities - which make them less vulnerable to short-term market fluctuations - have to fund against spot valuations. Greater smoothing is required, using data over many months rather on a single day.”
Smoothing was recently introduced in both the Netherlands and Denmark, with the Dutch regulator DNB allowing for a three-month average to calculate yields, while Danish schemes’ yield curve was based on a 12-month average.
Clive Fortes, head of corporate consulting at Hymans Robertson, said the announcement was “probably exactly as the industry has expected”.
He said there were two messages, assuring sponsors doing right by their scheme, with a “clear rebuke” for the 10% of funds that were not.
“I don’t think the reaction a company or trustee needs to take to a bigger deficit is necessarily more cash,” he told IPE.
“One of the comments the regulator has made is that they don’t expect those pension schemes that last had a valuation in 2009 to actually put in unduly different contributions now.
“Stability of cash contributions for companies is critical - the ability for a company to budget based on stable cash payments, year in, year out.”
He added that, with the market anticipating gilt yields returning to 4% within the next decade, it would be perfectly valid for companies to say they anticipated such rises and wanted to factor such changes into their recovery plans.