TPR 'inadvertently' imposes higher risks on schemes, consultancy says
UK – The UK regulator's intention to do away with automatic scrutiny of recovery proposals exceeding a decade has been welcomed by Hymans Robertson, which argued that the previous approach could have inadvertently increased deficits.
Speaking with IPE after the Pensions Regulator (TPR) published its annual guidance for defined benefit (DB) funds, partner Patrick Bloomfield said the 10-year trigger in place previously could have meant trustees pursued too risky an investment strategy.
He noted that the trigger could have "inadvertently encouraged" both trustees and sponsors to consider such an approach with the aim of lowering the technical provisions on which deficit reduction payments would then be based.
"The problem was not recognising the amount of risk resulting from a falsely easy technical provisions target and keeping too much risk on – which blew up with the movements we've seen in Gilt yields," he said.
Rival consultancy Punter Southall meanwhile noted that the unveiling of the regulator's new statutory objective marked the beginning of a debate on how the funding regime should change.
Draft wording for the objective – published today as part of the Pensions Bill that will also legislate for the singe-tier state pension – said TPR should "minimise any adverse impact on the sustainable growth of an employer".
Joanne Livingstone, technical director at Punter Southall, noted that the emphasis on sustainable growth would have "real implications" for both sponsors and trustees.
"The wording of the objective and resulting new Code of Practice will need to be extensively debated," she said, in reference to changes to the code on which the regulator said it would consult in the coming months.
"One key question [is], how will the regulator define the concept of 'sustainable growth' for a sponsoring employer? How will it demonstrate it has taken this into account?"
"So far, the regulator has faced little challenge to the way it operates within its existing objectives.
"This new objective raises the prospect of a sponsoring employer questioning whether or not the regulator has considered 'sustainable growth' from all angles."