UK: Ofgem Consults On Network Operator Pension Deficit Funding Policy

Last Updated: 7 July 2015
Article by Elmer Doonan, Andrew Patten, Jay Doraisamy and James Borshell


With the current price control period for electricity Distribution Network Operators having recently ended, Ofgem has launched a consultation on the future funding of deficits attributable to regulated activities.  The last round of full actuarial valuations for Network Operators' (NWO) pension schemes (as at 31 March 2013) showed a total deficit of approximately £7.5 billion, with £5.9 billion being attributable to members employed in regulated activities.  The current figure is likely to be much higher.

Ofgem's current approach

As a reminder, Ofgem's current approach to dealing with regulated activity pension deficits, set in 2010, is as follows:

  • Deficits relating to pensionable service before a cut-off date are passed through to customers.  The cut-off date is 31 March 2010 for Distribution Network Operators, 31 March 2012 for Transmission Operators and System Operators and 31 March 2013 for Gas Distribution Networks.
  • The deficits are to be paid down over a 15-year period from the cut-off date.
  • Ofgem monitors funding through triennial reasonableness reviews with NWOs being benchmarked against each other and fines being imposed on outliers.
  • Deficits attributable to service after the relevant cut-off date are dealt with as part of the benchmarking of total costs.

Problems with the current approach

Ofgem considers its current approach to protecting consumers and ensuring normal market incentives for schemes is not operating as effectively as it would like.  It is concerned that uncertainty about the size of deficits and how deficits remaining after the end of the current 15-year funding period will be met might encourage NWOs and scheme trustees to adopt overly prudent valuation assumptions, resulting in an unfair spreading of pension costs between current and future customers and, potentially, the overfunding of schemes.

Ofgem's proposals

Ofgem is consulting on the following key changes to its current policy:

  • NWOs will have the ability to agree a different period over which pre cut-off date deficits should be eliminated, if the amount of deficit has changed.  Funding over a longer recovery period than the current 15-year period will be passed through to customers.
  • Reasonableness reviews will focus on matters within the control of NWOs (rather than scheme trustees) and the specific circumstances of the NWO.  These will include issues such as liability management and the control of administration expenses.
  • NWOs will be required to report to stakeholders on how they are promoting good governance for their scheme and good end results for their customers.  This will include demonstrating the steps they are taking to avoid the risk of a trapped funding surplus.  NWOs will be subject to a requirement to address these issues as part of a new Statement of Regulatory Corporate Governance to be included in RIIO accounts.


Ofgem's proposals look sensible, particularly given current market conditions.  The move to look at each NWO's pension position more on its own merits and on the basis of what is within its control is to be welcomed.

The flexibility to agree revised recovery plans should help to spread funding costs more fairly across current and future customers and avoid the risk of overfunding leading to trapped surpluses.  The commitment that deficit repair costs arising after the end of the current 15-year recovery period can continue to be passed through to customers will also remove the effect of funding uncertainty on NWO capital costs.  Where deficits have increased since the last full scheme valuation, Ofgem is setting a benchmark recovery period of a further 15 years.

The proposals will bring the approach to the funding and governance of NWOs' schemes closer to that applying to unregulated sector schemes.  Ofgem is clearly wanting to encourage more focus by NWOs on scheme funding and investment strategies and increased engagement with trustees to ensure an approach which is aligned with long-term customer interests.  Ofgem continues to be supportive of NWOs agreeing risk reduction strategies with trustees which they can demonstrate are in customers' best interests.

Ofgem is expecting NWOs to be more rigorous in benchmarking total employee reward costs against those of other NWOs and the wider market.  Where the cost of future DB pension accrual results in costs being out of line with the benchmark, NWOs should be looking at whether the value of benefits can be reduced.  NWOs will need to consider their options carefully given the protections in place for members.  Ofgem also expects NWOs to be looking at other liability management techniques such as offering pensions increase exchange (PIE).  In the area of scheme administration expenses, Ofgem has said it will be collecting more data and NWOs should be looking closely at whether there is scope for efficiencies.  This could include outsourcing administration services or, where this has already been done, looking at whether it is possible to reduce charges.

If you would like to discuss any of the issues in this alert, including liability management exercises, administration outsourcing, or mechanisms to prevent overfunding, please contact a member of our pensions team or your usual Dentons contact.

The consultation closes on 16 July and a copy of it is available here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions