The Pensions Regulator has warned trustees against being over cautious when agreeing their pension funding plans and stressed the flexibilities available to employers struggling to close their scheme deficits.
In its second Annual funding statement, published today, the regulator sets out how defined benefit pension scheme valuations should be carried out in the current economic climate. This largely applies to schemes undergoing a valuation between September 22 2012 and September 21 this year.
It stresses that trustees can use the flexibility available in the regulatory system to calculate their future liabilities in a way that best suits the individual characteristics of their scheme and employer. They should also take this approach when making assumptions on investment returns, the statement says.
Trustees are also urged to take into account what is 'reasonably affordable' for employers when setting the level of contributions they are required to make to the pension scheme, and to consider giving employers longer to close their scheme deficit.
The statement encourages trustees to produce recovery plans which take an 'integrated approach' to managing the risks facing their scheme, including funding levels, investment performance and the employer covenant.
Michael O'Higgins, chair of The Pensions Regulator, said: 'I want to see pension trustees agree long-term strategies with employers that protect the interests of retirement savers, whilst also enabling viable businesses to thrive and grow. We expect them to mitigate the risks to their scheme, but this does not require them to be overly prudent.
O'Higgins noted that the regulator's analysis, published alongside today's statement, had found that schemes' circumstances differed greatly, and this showed different approaches were needed.
'Many are in a relatively strong position and our starting point will be that schemes should consider whether to maintain present levels of deficit contributions as agreed at the last valuation,' he explained. 'But some employers will struggle to pay that level of contributions - and may need to make use of the flexibility within the system.'
For its part, the regulator confirmed the move away from any kind of requirement for scheme deficit recovery plans to be 10 years long or less. Instead, it will use 'risk indicators', such as whether recovery plan contributions and the amount of investment risk appropriately reflects the strength of the employer and whether it can afford its contributions.
It also sets out how it plans to take into account the new statutory objective it is being given to take into account employers' economic growth when regulating schemes. After the objective is legislated for by the Department for Work and Pensions, the regulator will consult in the autumn on changes to its scheme funding code of practice and its approach to regulating DB schemes taking into account the new objective. This will lead to the publication of a new regulatory strategy in early 2014.
Katja Hall, chief policy director at the CBI, welcomed the news that the regulator was starting to take into account its new economic objective.
'The CBI has been clear for some time now that the best protection for member benefits in the long run is a thriving employer,' she said.
'The Annual funding statement however is just the 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.'
Andrew Vaughan, chair of the Association of Consulting Actuaries, stressed the benefits of flexibility, in particular around setting the discount rate used to calculate schemes' long-term liabilities.
'The key is that the TPR policy statement needs to be seen to be operating in practice at all levels within TPR, but we are encouraged by the signs we have seen already,' he added.