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Funds advised to 'back-end load' pensions recovery

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  • Funds advised to 'back-end load' pensions recovery

UK - The Pensions Regulator (TPR) has advised pension funds to do what they can to avoid extending pension recovery periods in the onslaught of recession but instead negotiate higher sponsor payments for the end of the term.

Its latest review of pension deficits and how they are being rectified indicated scheme funding had improved between 2005 and 2007 and clearance activity "is on a downward trend".

However, the latest report carries what some experts claim to be a mixed message about the action trustees should take, as officials recently stated pension funds should not overly burden employers where deficits are increasing but should now consider extending recovery periods.

More specifically, David Norgrove, chairman of TPR, has suggested pension fund executives should be sensible and try to negotiate the same timeframe though load the higher payments further down the time line when pressure on the economy and employers may have eased.

"Trustees should not over-react in the face of the downturn, but should ensure they are active and alert to potential changes in the health of the sponsor, and to the funding level of the scheme," said Norgrove.

"In responding to short-term cash flow difficulties trustees should first consider back-end loading recovery plans. Where valuations show a much larger deficit, then as we said in our October statement, this may result in longer recovery plans being proposed.  We will of course keep our approach under review as the situation develops."

John Ball, head of defined benefit consulting at Watson Wyatt, has argued TPR is "treading a tightrope" on pensions contributions in encouraging policy tailored to the economic crisis.

"It recently warned trustees not to be too hard on employers and is now warning them not to be too soft either. It knows that trustees could push companies over the edge if they demand more money than the company can pay but was never going to offer any kind of amnesty on pension contributions.

"The difference of emphasis today is that the Regulator thinks companies should be given longer to repay deficits where these have become ‘much larger'. In other cases, the Regulator may be trying to nudge trustees towards agreeing that companies can pay less during the recession but only on condition that this is made good quickly. Some companies may worry that a sharp rise in contributions will put a brake on their ability to benefit from the recovery."

Interestingly, Watson Wyatt, has also pointed out TPR is also advising firms and trustees to "put less weight" on accounting standards when agreeing how much should be paid over time, suggesting TPR has recognised the volatility of bond pricing is playing a key role in liability growth.

Watson Wyatt noted: "While the regulator's triggers and clearance guidance continue to recognise FRS17 liabilities as potentially being of relevance, it is clear that at the present time this measure is unlikely to represent an adequately prudent measure of technical provisions without further adjustment."

Ball said employers have seen the TPR's stance coming after the regulatory body labelled the impact of volatility and pension accounting rules as "bizarre".

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