UK - The Pensions Regulator (TPR) has confirmed the current economic difficulties could result in schemes submitting recovery plans for 2009 that include larger deficits, weaker employer covenants and longer recovery periods.

In a statement to be issued to all trustees of work-based pensions over the next few days, TPR noted the biggest issues for trustees would be falling asset values and weaker employer covenants and solvency problems.

TPR admitted "some schemes would be more affected than others", but claimed contact with larger defined benefit (DB) schemes had revealed a "relatively limited direct exposure to so-called ‘toxic' assets and limited involvement in derivative trades with counterparties that are in difficulty".

It added although a "few individual schemes" might have a high level of exposure to these assets the regulator had "not been informed of any significant problems and we do not believe the issue is systemic".

The statement highlighted falls in asset values and a weakening of the employer covenant are covered by the regulator's scheme-specific funding regime, and following a "review" of its existing approach in light of the current economic conditions TPR said "it remains fit for purpose".

It confirmed it has "no plans to change our codes of practice or make other specific announcements in relation to current market events" as it said the principles in the Code of practice: Funding defined benefits "are intended to work across a range of economic conditions, and we consider that they remain valid".

Instead, TPR said trustees should ensure they have structures in place to monitor their investment portfolio and identify any issues that arise, and to continue this 'best practice' in relation to both the overall investment approach and any exposure to "toxic" asset classes.

TPR also reassured trustees it had not received any "immediate evidence" indicating employers are failing to meet their commitments under agreed recovery plans, although it added more details on the recent tranche of plans submitted to TPR will be issued in December.

That said, the regulator said trustees with existing recovery plans in place should "consider reviewing and, if necessary, revising plans where there is a significant improvement or decline in the employer's covenant".

The statement added trustees "must judge whether their existing plans and processes in this area are adequate, given current conditions", but noted if any revisions to an existing plan are agreed, TPR "must be informed".

Looking ahead, TPR also revealed it anticipates "recovery plans arriving in 2009 may show larger deficits and weaker covenants due to the current economic difficulties," adding "this is likely to imply higher technical provisions and may result in longer recovery periods being proposed".

Despite this, TPR said it expected the existing funding triggers, which include a recovery plan of longer than 10 years, will "remain unchanged" though added its "operational processes will continue to reflect the conditions in which recovery plans were produced".

Meanwhile, trustees of defined contribution (DC) schemes are also being urged by TPR to "give careful consideration to their member communications at this time", to ensure members are aware of all their options, and to prompt them to review their position.

Although members of DC schemes have more responsibility for the final outcome of their pension fund, TPR suggested trustees of trust-based DC schemes "may also want to review the position of member segments that may be at particular risk due to current economic conditions".

David Norgrove, chairman of TPR, pointed out the main issues faced by pension schemes in the current economic climate "seem likely to be the more general fall in asset values and emerging pressures on employer covenants".

He said: "For DB schemes, both aspects come together within the existing scheme funding framework. We believe this framework is flexible enough to deal with current conditions, recognising that pension schemes are long-term undertakings. For DC schemes, the issues are different, but again we believe our existing guidance will help trustees, employers and members."

"Trustees should continue to focus on making sound decisions in the long-term interests of scheme members," he added.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com