UK - Ofgem, the UK energy regulator, is to continue with plans to apply a 15-year optional funding period across all energy companies, in a bid to recover the cost of pension deficits from customers.

This is despite industry criticism of the proposal - which was part of a wider review of energy firms' price controls that are set by Ofgem every five years - who raised concerns that 15 years is longer than the funding period set by The Pensions Regulator (TPR). They argued this could place undue pressure on trustees. (See earlier IPE article: Energy regulator to encourage longer UK pension funding periods)

However, Ofgem claimed that reducing the funding period to 10 years would increase consumer costs by £430m (€475m) over the next five years. It has therefore been in discussions with TPR since the last consultation in October, concerning the interaction of the regulatory frameworks for the energy markets and for work-based pensions.

It stated: "TPR recognises that the treatment of pension costs, including pension deficits, in regulatory pricing decisions is a matter for the economic regulators. TPR is clear, however, that the approach of trustees to setting funding targets and deficit recovery plans is independent of the decisions taken by the economic regulators on pricing."

The final report from Ofgem claimed that pension trustees would need to form their own views on the strength of the employer covenant and affordability of deficit repayments. But it noted that TPR intends to "communicate shortly" with trustees of schemes with employers subject to economic regulation, such as gas and electricity companies. 
 
Ofgem has, however, made some changes to its treatment of pension costs following industry feedback. It acknowledged that because energy companies, or Distribution Network Operators (DNOs), have limited control over costs associated with staff who have protected pensions, they will only have to pay 20% of any extra costs they incur above the estimated level, instead of the original proposal of 50%.

In addition, the regulator admitted that plans to use the Pension Protection Fund's (PPF) 7800 Index as a trigger for an efficiency review into deficit movements could be inappropriate. Instead, it has agreed to suggestions that it should use the Government Actuary's Department (GAD) to review deficit movements and establish if there is a case for a full review.

The trade union Prospect welcomed the decision to scale back the previous "radical plans", but claimed the regulator "should have left the existing system in place".

Mike Clancy, deputy general secretary of Prospect, pointed out that while companies will only have to pay 20% of the extra cost if they overbid on their pension costs, they can keep up to 50% of any savings they make if the figure is overestimated.

Clancy warned: "This is a crude attempt to incentivise companies to reduce pension costs where they can. One effect could be that companies overbid in the first place, which begs the question of how much money will actually be saved. And we repeat our warning that if any company does use this new system to attack defined benefit (DB) schemes, our members will not tolerate it."

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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