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UK pension regulator's statement on deficits signals 'era of flexibility'

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  • UK pension regulator's statement on deficits signals 'era of flexibility'

UK – New regulatory guidance on deficit funding has been welcomed for ushering in an "era of flexibility" for UK defined benefit (DB) funds, as the Pensions Regulator (TPR) indicated it would move away from 10-year recovery periods and focus rather on the design of the underlying recovery plan.

Publishing its second annual funding statement, the regulator's chairman Michael O'Higgins said it was important to protect the interests of scheme members, while also allowing companies to "thrive and grow" – language likely used to emphasise TPR's new statutory objective to consider the impact of funding proposals on employers, announced in late March.

O'Higgins added: "We expect [trustees] to mitigate the risks to their scheme, but this does not require them to be overly prudent."

The regulator's chairman previously warned trustees against being "recklessly prudent", a theme expanded upon in the funding statement.

It noted that trustees should opt for an integrated approach when examining covenant, investment and scheme funding risks.

"This evidence need not be an undue burden or additional exercise but could be part of the development of good governance by demonstrating a sound risk-management approach for the scheme," it continued.

"This will enable trustees to incorporate the ability of employers to support the scheme in their overall risk management approach and allow for an appropriate level of risk to be taken that is neither overly prudent nor overly optimistic."

Zoe Lynch, a partner at law firm Sackers, said the statement had a "softer tone" than the inaugural publication, released last April.

"This year's statement seems like a stepping stone towards an era of flexibility for DB scheme sponsors to be ushered in with TPR's new objective to consider long-term affordability for scheme sponsors," she said.

The statement said it would move away from the use of 10-year regulatory triggers based around individual points, such as specific technical provisions, and would "continue to evolve [a] suite of risk indicators", including whether the investment risk taken on by trustees adequately reflected the strength or weakness of the sponsor.

As part of a revised code of practice, it promised that a forthcoming consultation would examine how TPR assessed risk.

"We will be seeking stakeholders' feedback to ensure our approach is appropriate whilst remaining flexible enough to adapt to changes to individual scheme and employer's circumstances, as well as to market conditions," it said.

Joanne Segars, chief executive of the National Association of Pension Funds, said the regulator's repeated emphasis on flexibility was a "helpful step" following low growth and the impact of the Bank of England's quantitative easing programme.

"The statement has shifted away from last year's heavy bias on basing investment return assumptions on risk-free assets and Gilts, and instead recognises that pension funds are confronting some major challenges, and that a broader view is needed," she said.

Segars added that the regulator needed to "stand by its signals" and allow trustees to avail themselves of the flexibility, a sentiment echoed by the CBI, the UK business lobby.

Katja Hall, chief policy director at the body, said the statement was merely a start.  

"Businesses will be looking for a clear step-change in the Regulator's behaviour, with the new objective reflected in every single speech, statement and the updated code of practice," she said.

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