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UK Pensions Speedbrief: TPR’s new statutory objective revealed, but what will it mean in practice?

    • Pensions - Speedbriefs

    17-05-2013

    The Pensions Regulator’s new statutory objective has been revealed in the new Pensions Bill which has been presented to Parliament. The new objective will mean that, in the context of its scheme funding functions, the Regulator will in future be required “to minimise any adverse impact on the sustainable growth of [a scheme’s sponsoring employer(s)]". But what will this mean in practice?

    The new statutory objective

    Following weeks of speculation about the scope of the Pension Regulator’s new statutory objective (which was first announced in George Osborne’s Autumn statement at the end of last year) the waiting is now over. Clause 42 of the new Pensions Bill which was presented to Parliament on 9 May provides that in relation to its scheme funding functions, the Regulator will in future be required:

    “to minimise any adverse impact on the sustainable growth of an employer." 

    The proposed new statutory objective, which is still subject to Parliamentary approval, is (at least in theory) wider than that originally outlined by the DWP in its call for evidence in January this year, in which the DWP indicated that the Regulator would be given a new statutory objective “to consider the long-term affordability of deficit recovery plans to sponsoring employers”.

    The emphasis on growth in the latest incarnation of the new statutory objective is consistent with the Government’s wider policy of requiring non-economic regulators to have regard to growth in the exercise of their regulatory functions and it has been welcomed by employers. But what practical impact is it likely to have?

    Greater flexibility

    It is likely that the introduction of the Regulator’s new statutory objective will result in some employers being given greater flexibility when agreeing the technical provisions and recovery plans with their scheme’s trustees, particularly where an employer is in financial difficulty or where greater flexibility is needed to enable it to invest in its business. This was strongly hinted at in the Pensions Regulator's 2013 annual funding statement, issued on 8 May 2013 (the day before the Pensions Bill was published), in which the Regulator said that “trustees may need to make greater use of the flexibilities available than needed for their preceding valuations”.

    The Regulator’s statement also made clear that “where there are significant affordability issues trustees may need to consider whether it is appropriate to agree lower contributions and this may also include a longer recovery plan… Where there is tension between the need for scheme contributions and for investment in the employer’s business, it is important that the solution found neither damages the employer’s covenant nor benefits other stakeholders at the expense of the scheme. If investment in the business is being prioritised at the expense of what otherwise would have been affordable contributions, it is important that it is being used to improve the employer’s covenant.”

    In exchange for greater flexibility (such as adopting more optimistic assumptions or agreeing to a longer recovery period), it is likely that the Regulator will expect trustees to secure additional security for their scheme (where appropriate). This is likely to mean that the use of innovative funding arrangements, such as asset backed contributions, will become increasingly common as trustees and employers look for ways to balance the cashflow needs of the business with the security of members’ benefits.

    A less stringent regulatory approach

    In the context of recovery plans, the Regulator reiterated in its latest statement that “in setting contribution levels trustees should take into account what is reasonably affordable for the employer” and that “as a starting point, trustees should consider whether the current level of contributions can be maintained.” However, this year’s statement did not refer to contributions being maintained “in real terms” - a notable change from last year’s statement.
    The Regulator also confirmed that it is moving away from using specific triggers to help it identify schemes with inappropriate funding arrangements. Instead it plans to use a suite of risk indicators as part of a new filter mechanism. These risk indicators include:

    • whether recovery plan contributions and the amount of investment risk appropriately reflects the relative strength of the employer and also the affordability of contributions
    • any specific issues and concerns relating to the deterioration in sponsor covenant strength or possible avoidance
    • the shape of recovery plans including initial low levels of contributions
    • the investment performance assumed over the life of the recovery plan, and
    • any significant issues that the Regulator had with previous valuation submissions.

    These changes suggest that the Regulator may already be adopting a less stringent approach to regulating funding matters.

    Integrated risk management

    The Regulator has also made it clear in its last two annual funding statements that trustees should take an integrated approach to addressing covenant, investment and funding risks in the form of a financial management plan.  This would demonstrate how the parties’ approach to the valuation allowed “for an appropriate level of risk to be taken that is neither overly prudent nor overly optimistic”.

    When does the new objective come into force?

    The new statutory objective is due to come into force two months after the Pensions Bill receives Royal Assent. This means that it is unlikely to come into force until the beginning of next year. In the meantime, technically speaking, the Regulator does not have to have regard to growth in the exercise of its scheme funding functions. However, the Regulator’s annual funding statement suggests that the new objective is already changing the Regulator’s approach.

    The Regulator plans to consult later this year on revisions to its scheme funding Code of Practice to reflect the new objective and this should give an even clearer indication of the practical impact of the new objective.

    To find out more about the practical impact of the Pensions Regulator’s new objective, please speak to your usual Eversheds’ adviser.

    For more information contact

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