UK - Trustees should welcome a sponsor’s decision to invest in the company over increasing contributions where this strengthens the employer covenant, the chairman of the UK’s Pensions Regulator (TPR) has said.

Addressing a conference in London yesterday, Michael O’Higgins warned defined benefit scheme trustees not to be “recklessly prudent” during deficit reduction negotiations and said that a Gilt-only investment strategy was not necessary if the covenant was strong.

“There will be occasions when the right thing to do for the employer and the scheme will be to invest in the growth of the sponsoring company rather than making higher pension contributions,” he said.

“Trustees can welcome this where it improves the employers’ ability to fund the scheme over the longer term.”

The chairman added that TPR did not expect funds to reach full funding within 10 years of the initial recovery plan being agreed, noting instead that a “trigger” was previously employed to further scrutinise funds if their recovery periods exceeded a decade.

“Today, I would like to make it clear that our approach to reviewing recovery plans does not hinge on a 10-year trigger,” he said. “There is no upper limit to recovery plan lengths, and what is appropriate will depend upon the individual circumstances of the scheme.”

In a reference to the volatile equity market that has seen some schemes de-risk and employ a liability-driven investment strategy based around sovereign debt, he said: “Legislation does not require trustees to only invest in Gilts. Those schemes with a strong employer underpinning pension promises may be able to afford to take more risk.”

O’Higgins said he saw “no reason” pension funds with a strong covenant should not invest in the domestic economy “through the many equity or debt investment vehicles available”.

In other news, separate surveys by Xafinity Consulting and Mercer found that deficits in UK pension schemes fell dramatically between the end of August and the end of September.

However, despite an estimated £130bn (€162bn) decrease month on month, according to Xafinity, the nearly £450bn deficit across the country’s DB pension funds remains higher than September last year.

Mercer, meanwhile, estimated that the deficit among FTSE 350 companies fell by around 33% over August, with funding ratios now up 3 percentage points to 92%.

Ali Tayyebi, head of DB risk at the consultancy, said this was a positive development as companies approached the year-end reporting period.

“September has been the standout positive month this year so far, but experience shows that the factors causing the improvement could reverse just as easily,” he said.