There has been much press coverage of the effect that the fall in the FTSE is having on pension schemes. The Pensions Regulator has issued a statement outlining the issues trustees should be addressing.

Defined benefit schemes

The economic situation has a twofold impact on defined benefit schemes. First, the general fall in asset values will increase deficits in schemes. Second, the economic slowdown will weaken the employer covenant. The Regulator has reviewed its approach to funding of defined benefits schemes and considers that it remains fit for purpose, although it will keep the Code of Practice and other guidance under review.

The Regulator reminds trustees that recovery plans are not fixed in stone between triennial actuarial valuations and that it is good practice for the employer covenant - the employer's current and prospective financial standing for supporting the scheme - to be kept under review. We would advise trustees that the employer covenant should be a standing item on its regular meetings and that trustees should agree a regular flow of information from the employer to enable them to review the covenant. The Regulator's statement says that a recovery plan can be revised if it creates a serious risk to the employer's solvency, but that any review will need careful consideration.

The Regulator has no plans to alter its current "triggers" for reviewing actuarial valuations: namely, that the scheme's technical provisions should be, at or higher than, PPF/FRS17 liabilities and the recovery plan should not exceed 10 years. The Regulator stresses these are triggers not targets and anticipates that recovery plans in 2009 will show larger deficits (due to a combination of lower asset values and weaker covenants which imply more conservative assumptions) and longer recovery periods. It follows that the Regulator is likely to be reviewing more schemes which have triggered on the recovery plan basis.

Defined contribution schemes

The Regulator suggests that trustees of defined contribution schemes should carefully consider their member communications. In particular, the Regulator highlights the open market option and lifestyling as areas where members should be aware of the options available.

The Regulator's statement makes only a brief mention - in the context of occupational schemes as a whole - of the importance of trustees having structures in place to review investments and deal with any issues which arise. Surprisingly, it does not refer to trustees of defined contribution schemes also having duties in relation to investments. Section 33 of the Pensions Act 1995 prevents trustees from excluding any duties in relation to the investment powers and, even if members have the power to select investments, there are likely still to be duties regarding the selection and monitoring of investment providers.

Society of Pension Consultants

The Society of Pension Consultants has called on the Government to implement a short-term easement for defined benefit schemes including:

  • a temporary funding amnesty where the sponsoring employer is in financial distress;
  • a temporary amnesty of PPF levies; and
  • a commitment from the Government to stand behind the PPF.

The Government has yet to respond to these proposals; but the idea of the Government guaranteeing the PPF would represent a fundamental change from the original concept of a protection scheme funded by pension schemes and we doubt that it will be accepted.

The Pensions Regulator's statement is available at: www.thepensionsregulator.gov.uk/pdf/StatementToTrusteesOct08.pdf

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.