Financial markets have played havoc with the state of funding for corporate pension schemes. The Pensions Regulator has now bowed to pressure and published his views on what should be done.
Hugh Creasy, Director at Xafinity Corporate Solutions, said: “the Pensions Regulator has gone on record to agree that gilt yields are currently depressed as a result of Quantitative Easing. Such a statement may be surprising as this has now become something of a political issue with both Steve Webb and Mervyn King denying a link between QE and pension costs within the last few weeks.”
Hugh continued: “the Pensions Regulator quite rightly points out that the rules trustees and sponsors have been working to are already flexible enough to cope with the current state of affairs. The Pensions Regulator should be lauded for having drawn together fundamental principles which are now standing the test of extreme market conditions.”
The Pensions Regulator’s main message is to deter trustees from fudging the size of current pension scheme deficits. He has been lobbied by some for recognition of a “normal” level for gilt yields and that pension scheme liabilities should be smoothed or even wholly adjusted to this “normal” level. The Pensions Regulator is quite rightly pressing all parties to recognise the size of the problem without a veil of subjective adjustments.
The real opportunity for managing current circumstances lies in managing the recovery plan and the Pensions Regulator has supported this.
“The real, practical purpose of the funding valuation is to set sponsor contribution rates”, said Hugh. “There are already perfectly sound ways of designing funding strategies which do not radically alter the sponsor’s cash commitments. It is also encouraging that the Pensions Regulator reaffirms the need to adopt rates which are affordable. He fully recognises the need to allow sponsors to remain in business and capable of providing financial support to their pension schemes over the longer term.
“The Pensions Regulator does raise a challenge over use of sponsor resources for dividend payments rather than cash funding of the pension scheme. However, sponsors and trustees are guided to treat the competing demands on sponsors “equitably”. Equitable does not mean equal; the Pensions Regulator will have chosen his language carefully.”
Trustees and sponsors will need to take their time evaluating their options for funding strategies and have the opportunity to do so. The Pensions Regulator’s guidance may not present anything truly new, but it should provide some comfort that they can continue to manage sponsor funding as a genuine long term exercise and not a series of disjoint, short term decisions.
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