The Pensions Regulator (TPR) is allowing pension schemes greater flexibility when it comes to funding that does not rely heavily on basing investment return assumptions on risk-free assets and gilts.
This regulator’s annual funding statement, published today, allows for an appropriate level of risk to be taken that is “neither overly prudent nor overly optimistic”.
It makes clear that trustees can use the flexibility available in setting the discount rate to calculate future liabilities, based on the yield held by assets of the scheme and/or the yield on government or high-quality bonds, to best fit their circumstances.
This is opposed to last year’s statement which had a heavy bias on basing investment return assumptions on risk-free assets and gilts.
TPR chairman Michael O’Higgins (pictured) said: “I want to see pension trustees agree long-term strategies with employers that protect the interests of retirement savers, while 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.
“As our analysis shows, circumstances differ greatly between schemes. 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. But some employers will struggle to pay that level of contributions – and may need to make use of the flexibility within the system.”
The National Association of Pension Funds welcomed TPR’s “broader view” on scheme funding.
Chief executive Joanne Segars said: “The regulator has put more emphasis on the flexibilities open to pension schemes grappling with the very low gilt yields resulting from the weak economy and quantitative easing, and that is a helpful step.”
However, Segars warned it is one thing to talk about flexibility and another to allow it to be used. “The regulator must stand by its signals,” she added.
TPR said in the last year it has engaged proactively with about 40 large schemes with 2012 valuation dates to address issues at an early stage and will continue this approach with a selection of schemes conducting 2013 valuations.
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