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Scheme funding: TPR issues statement on trigger points
by Ian Neale 08/05/2006
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The Pensions Regulator has published a formal statement on the approach it will take to regulating funding of defined benefit pension schemes. As we reported when the Code of Practice was issued in February 2006, TPR has always been keen on the idea of using trigger points as a kind of filter in its risk-based strategy. There are over 10,000 defined benefit schemes and most of them are currently in deficit, TPR believes; so some means of determining where the greatest risk lies is necessary.
Respondents to the October 2005 condoc [PDF] made some positive comments about this and so TPR has chosen to continue to use an approach focused on triggers. In its press release last week, though, TPR emphasised that "triggers are primarily a mechanism for the regulator to focus its resources. They are not and should not be seen as targets for pension schemes."
The new funding regime is scheme-specific, so an immature pension scheme with a strong employer might 'trigger' in spite of not posing any risk, while on the other hand a mature scheme with a weak employer might not trigger but still pose a risk. Flexibility is to be the watchword. Trustees are warned against relying solely on the trigger mechanism to tell them whether they have set prudent technical provisions or appropriate recovery plans in the context of their scheme.
Significantly, TPR has recognised the unreliability of estimating the buyout cost of the liabilities, and the undesirability of using a percentage of such a measure as a key trigger. Instead, it proposes to look at the actual values for section 179 and FRS 17 liabilities. This is likely to consume more of TPR's resources, as it seeks to achieve a satisfactory balance between a rigid framework at one extreme and an entirely scheme-specific basis for assessment at the other.
The statement retains a ten-year trigger for recovery plans, although TPR will expect to see shortfalls eliminated as quickly as the employer can reasonably afford - with an emphasis on "reasonably". This period could vary between five and fifteen years, it is thought. Various factors will be taken into account, but broadly speaking, the circumstances where a scheme will trigger will include:
- the recovery plan is longer than ten years;
- the recovery plan appears to be significantly back-end loaded (higher contributions towards the end); or
- assumptions underlying the recovery plan, especially investment assumptions, appear inappropriate.
Some schemes presently remain subject to the MFR (up to their first actuarial valuation based on an effective date of 22 September 2005 or later), so it could be 2009 before all schemes have completed a valuation under the new scheme-specific basis. These schemes will be strongly encouraged in the meantime to aim at a considerably higher funding target than the MFR requires, and to point out to the employer that any reduction in an existing funding shortfall (perhaps using contingent assets) will also have the benefit of reducing the level of the risk-based levy paid to the PPF.
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