(April 27, 2012) — New guidelines on flexibility around funding ratios, issued by the United Kingdom’s Pension Regulator, do not go far enough in making allowances for the tough economic climate, industry sources have claimed.
Companies running defined benefit funds that are reporting their funding position in the 12 months to the end of September this year will be viewed with leniency by the watchdog and may not be forced to put such strict recovery plans in place as would be due in more ‘normal’ economic conditions, the regulator said today.
However, some have claimed the guidelines still do not go far enough.
Kevin Wesbroom, Managing Principal at Aon Hewitt, said: “Unlike the regulator, we think that deficits in this cycle of valuations will be materially higher – after all, liabilities are typically one-third higher than three years ago. Asset values have also increased since March/April 2009. However, following their 2009 valuations, many schemes’ recovery plans were agreed based on a position after equity markets had recovered in early 2010. Where this is the case, schemes will be looking at deficits which are far larger than are addressed by their current recovery plans.”
Others were concerned that the regulator would not be taking Quantitative Easing (QE) into account.
Neil Carberry, Director of Employment & Skills Policy at the Confederation of British Industry, said: “The Bank of England’s QE programme has exposed a fundamental problem with the way pension scheme funding is calculated, which the regulator fails to address. Although QE has been necessary to support the economy, one side effect has been to make pension scheme deficits look artificially big by lowering gilt yields at the very moment when firms are also doing their three-yearly valuation.”
Carberry said despite the Pensions Regulator acknowledging the side effect of QE, its advice failed to deal with the problem, namely how ‘technical provisions’, the amount required to cover a scheme’s liabilities, are calculated.
He added: “Increases in deficits distorted by QE lead to demands for even more money from hard-pressed employers. They divert money away from investment in growth and job creation and lock it away unproductively. This can have serious implications for firms’ credit ratings, as well as their ability to raise finance and their market outlook. The best form of protection for members’ employment benefits is a healthy, solvent employer and the Regulator and DWP should put this first.”
The regulator also said that it would be keeping an eye on dividend payments made by companies to shareholders when they had a deficit-stricken pension fund that needed attention.
Joanne Segars, Chief Executive of the National Association of Pension Funds, said: “It is good that that the Regulator will look sympathetically on employers that have experienced significant deficit increases by allowing extensions in recovery periods and, in some cases, allowing recovery plans to take on board any potential improvements in economic conditions. However, as the negative growth figures this week have shown, the outlook for the economy remains highly uncertain and there is the possibility that more QE will unfold. Whilst the regulator is optimistic that the majority of pension schemes will not need to make significant increases in their contributions, it will need to stand ready to adjust its expectations if the real experience of pension schemes turns out to be far worse.”
There are 33 points made by the regulator in its annual funding statement. The organisation’s Chief Executive, Bill Galvin defended its stance: “There are a number of economic factors impacting gilt yields, such as QE and demands for UK sovereign debt from the international banking sector. We have been in a low interest climate for some time. Yields have fallen further in the last nine months, and it is unclear when and to what extent there will be a market correction. The net effect across defined benefit schemes is not uniform and will vary greatly depending upon the extent to which their risk-management, investment and contribution strategies have insulated them from the effects.”