UK - Despite the recent economic conditions, 40% of defined benefit (DB) and hybrid recovery plans with a scheme valuation date between September 2007 and 2008 managed to avoid the Pensions Regulator's (TPR) funding triggers.

However, the regulatory body has warned many schemes are relying on a recovery in investment performance to pull back the schemes' funding levels.

TPR's latest analysis of recovery plans for schemes with a valuation date of between 22 September 2005 and 21 September 2008 - which is split into three one-year tranches - revealed funding levels had worsened in the latest round of submissions. They fell to a weighted average of 84.7% of technical provisions and 95% on a section 179 basis, as a result of adverse market conditions.

Examination of the 4,931 recovery plans, covering 67% of the schemes eligible to enter the Pension Protection Fund (PPF), showed the recovery plans in the third tranche - between 22 September 2007 and 21 September 2008 - had been agreed in more turbulent times but trustees were also working with sponsors to maximise the flexibility of the recovery plan regime.

This led to an increase in the length of time a recovery plan should take to complete, to a weighted average of 8.3 years against 6.1 years for schemes in the second tranche, and a rise in the use of 'back-end loading', which in some cases was supported by additional forms of security such as contingent assets. 

Figures showed that 40% of the latest scheme recovery plans did not activate any of TPR's four triggers on technical provisions, a recovery plan of more than 10 years, an excessively back-end loaded plan or an inappropriate investment return assumption.

That said, of the 60% that did hit one or more triggers, 36% of schemes hit the technical provision trigger, 12% triggered on back-end loading and 18% on recovery plan length, while 25% of recovery plans activated the trigger on investment return assumptions.

In addition, TPR noted that recovery plans from the third tranche adopted a higher effective single discount rate over UK yields, which it said "implies, all else being equal, a slightly greater reliance on investment outperformance to meet scheme liabilities". So it confirmed that going forward "we will continue to monitor developments in this area".

TPR said it expected to receive another 600 recovery plans before the third tranche is completed, but noted: "In general, the recovery plans appear to reflect both the deterioration in financial conditions, and an increase in the understanding of the scheme funding regime, as trustees use the flexibility available in recovery plans to accommodate the difficulties experienced by some sponsors during turbulent market conditions."

David Norgrove, chair of TPR, said the three tranches of scheme valuations were conducted in different economic circumstances so the analysis explores some of the effects of the downturn on scheme funding.

He added: "We urge trustees to continue to take a prudent approach to assessing schemes' technical provisions, to maintain an honest and open dialogue with employers and to remain aware of the changing economic situation as they focus on the long-term interests of scheme members."

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