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Energy regulator to encourage longer UK pension funding periods

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UK - Ofgem, the regulator of UK electricity and gas companies, has presented fresh proposals which could see energy firms incentivised for lowering pension costs instead of passing the charge to consumers' bills.

This latest round of proposals is part of a wider review of energy firms' price controls, which are set by the regulator every five years, and which it hopes will pass on cost savings to the consumer.

Ofgem officials acknowledge the body has no power to dictate to companies what their pension fund policy should be, as this is a negotiation between pension fund trustees and officials, sponsors and members.

Yet new price controls will be imposed on each group of ‘network operators' from 1 April, 2010, so the latest consultation said Ofgem is "minded to" consider four options which it hopes could improve costs to the end energy consumer and allow companies to keep some or all of the ‘outperformance' set by the energy regulator.

Existing pension costs are subject to "fairly light rules, according a spokesman for Ofgem. So rather than impose penalties around the management of pension costs, Ofgem said it may provide financial incentives to be offset against other elements of firms' regulation.

Its main proposal - option 3 - is to incentivise firms to lower costs by managing pension costs through a longer pensions deficit funding period, albeit they must maintain their commitments to fully fund any plans as long as they are managed efficiently.

Such a move could be tricky for energy firms, however, as all of the major UK energy pension funds they sponsor - Electicity Supply Pension Schemes, National Grid, E.ON UK, RWE Npower Group, EDF Energy and Centrica - saw their capital values fall by at least 20% last year, according to IPE's Top 1000 European pension fund survey.

The options for incentivising pension costs within the overall price control proposition include maintainting the status quo, looking at the ongoing costs of the company in general, extending the deficit recovery period - Ofgem's "minded to" option - or benchmarking companies so charges are pitted against each other; a move which would be much more demanding on parties involved, said the spokesman.

The Ofgem consultation closes on 13 November, and is likely to generate a conclusion in December.

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