Chancellor George Osborne's Autumn Statement mentioned that the Department for Work and Pensions will be consulting on a new statutory objective for the Pensions Regulator to consider the long-term affordability of deficit recovery plans, and whether to allow companies undergoing scheme valuations in 2013 or later to smooth asset and liability values.
On December 5 2012, Chancellor George Osborne made his Autumn Statement. This mentioned that the Department for Work and Pensions will be consulting on a new statutory objective for the Pensions Regulator to consider the long-term affordability of deficit recovery plans, and whether to allow companies undergoing scheme valuations in 2013 or later to smooth asset and liability values.
The announcement demonstrated that the government is aware of the problems that the current low gilt yield world is causing for pension scheme funding in many defined benefit (DB) schemes. Increasing liability valuations have not been accompanied by increasing asset values. Deficits have risen and funding requirements have increased, with recovery plans pushed further into the future. As economic conditions remain challenging, many sponsors have struggled to grow their business while trustees ask them for increasing pension contributions.
In April 2012, the Pensions Regulator commented that the current funding regime offered the correct degree of flexibility. However, the autumn conference season offered other bodies opportunities to spell out how they would like to see easement of the current conditions. HM Treasury has heard the comments and the DWP will consult.
As a body, the Institute and Faculty of Actuaries supports the Pensions Regulator's view that the present regime is suitable, but if a consultation process is to commence (and we believe this will happen before the second quarter of 2013), it is important that the right questions are asked. No-one will benefit from a new regime that could lull trustees and scheme sponsors into viewing the world through a skewed looking glass.
In the Code of Practice on Scheme Funding, the word 'afford' appears once in paragraph 101: "Trustees should aim for any shortfall to be eliminated as quickly as the employer can reasonably afford. What is possible and reasonable, however, will depend on the trustees assessment of the employer's covenant." If a new sentence were added to paragraph 2, where the objectives are set, would there be any difference to the funding regime? Would trustees continue to have discretion on what is affordable, or would the Pensions Regulator assess that? Assuming trustees have taken affordability into account when setting recovery plans, will this addition to the objectives change anything? As most schemes are not sponsored by FTSE 350 companies, is there sufficient knowledge within the Pensions Regulator to allow informed decisions to be taken on affordability of schemes?
The law of unintended consequences could also result in the regulator intervening where affordability has not been an issue for trustees. Could the regulator ask for sponsors to pay more quickly because there is a stockpile of cash or other liquid assets on the balance sheet?
The consultation should also cover the relationship between objectives. If the inclusion of affordability within objectives were to lead to lower contributions, this would, at first glance, reduce security within schemes, which would increase potential claims on the Pension Protection Fund (PPF). Almost certainly there would be an offset to lower contributions from increased levies.
Changing an objective is straightforward, but it is the implication of that change that could be significant.
The Institute and Faculty of Actuaries is interested in hearing from members about the questions that should be asked within the upcoming consultation. These should address practical concerns and unintended consequences rather than the historical debate of the sustainability of valuation methods, although members understandably hold strong views on that subject. Please contact Philip Doggart, policy manager at the Institute and Faculty of Actuaries, with any comments.
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