UK - The Pensions Regulator (TPR) has stressed the importance of "prudent" funding levels for pension schemes, and warned that while flexibility is available in recovery plans the pension scheme and members "should not be disadvantaged".

In a statement on 'Scheme Funding and the Employer Covenant - Prudence, affordability, applying flexibility through the economic cycle' TPR acknowledged that economic and financial conditions had resulted in cash constraints for many employers in the short-term and uncertainty over the long-term.

However, while TPR said recovery plans for pension deficits would be looked at on a case-by-case basis - with existing plans ranging from one to 20 years in length - it warned trustees should not compromise technical provisions to make recovery plans appear affordable.

The regulator pointed out the technical provisions are the scheme-specific funding standard which pension schemes must target, and which TPR requires to be 'prudent', but it added "at the current time, FRS17 is unlikely to represent an adequate level of prudence without further adjustment".

Other issues raised in the statement include the strength of the employer covenant and how it affects the prudence of the technical provision alongside ways of making the recovery plan more flexible without necessarily extending it, such as "back-loading" contributions.

The statement was published following a series of nationwide funding workshops, and is supported by a range of online case studies designed to offer trustees "further insight into the important task of setting funding targets and agreeing recovery plans".

David Norgrove, chair of TPR, said: "Where sufficient prudence has been built into funding targets, a sensible consideration about the length of the recovery plan and schedule of annual payments can occur. That's the balance we need to strike to best secure member benefits for the long-term and to enable employers to play their part in the economic recovery."

However, speaking at a pensions conference hosted by the Confederation of British Industry (CBI) earlier today, Norgrove argued the trigger point of 10 years for the TPR to scrutinise a recovery plan should not be moved.

He told delegates that "liabilities are not flexible and trustees should not allow the current economic conditions to disguise the true cost of their scheme's liabilities", and so the trigger of 10 years is a "trigger for scrutiny" although as affordability conditions tighten this "means more scrutiny".

He also added TPR has responsibilities to trustees, members and businesses, so while he agrees on the need for flexibility "where appropriate and sensible; I disagree that in the biggest economic crisis I've seen in my lifetime it would be responsible to move the trigger for scrutiny of recovery plans". 

Norgrove warned this would make the trigger a "target, a moveable benchmark, a function of the economic cycle - that is simply not what it is for; and I don't think in the long-term this is the right choice for CBI members".

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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