The Pensions Regulator

Recovery plans show positive trends in addressing pension deficits - but challenges ahead

Ref: PN08-27
11 December 2008

Positive steps have been made to address pension deficits through the scheme funding regime, and clearance activity is on a downward trend, data published today by the Pensions Regulator shows.

The report outlines the regulator's findings in relation to scheme funding where recovery plans have been put in place, updating last year's similar report. This year, data has also been included on applications for clearance – the voluntary process to obtain assurance from the regulator that it will not use its powers in relation to transactions that affect a pension scheme.

Pensions Regulator chairman David Norgrove said: "Scheme funding improved between 2005 and 2007 but current economic conditions are far more difficult.”

“Trustees should not over-react in the face of the downturn, but should ensure they are active and alert to potential changes in the health of the sponsor, and to the funding level of the scheme. In responding to short-term cash flow difficulties trustees should first consider back-end loading recovery plans. Where valuations show a much larger deficit, then as we said in our October statement, this may result in longer recovery plans being proposed.  We will of course keep our approach under review as the situation develops."

Scheme funding – key findings and economic conditions

While the recovery plan data shows positive steps being made to address deficits, the recovery plans were for the most part set in economically benign circumstances.

• Technical provisions increased from 107% to 119% of s179 liabilities. The average technical provisions funding level also increased, from 86% to 90%.
• Longevity assumptions have strengthened. Average assumed expected age at death for a 65-year-old increased for men from 85.3 to 86.0 years for current pensioners, and 86.5 years to 87.6 years for future pensioners currently aged 45.
• Weighted by scheme size, average recovery plan period reduced from 9 to 6 years. Unweighted average fell from 7.7 to 7 years.

Economic factors affecting recovery plans received over the next year will be very different. During this time the regulator expects to see:

• Trustees keeping the employer covenant, and existing recovery plan, under review.
• Continued primacy given to the selection of adequately strong technical provisions, relative to the employer covenant.
• Recognition that there should be less weight put on FRS17 as a measure, given that higher corporate bond yields have led it to diverge from other measures.
• Where there are short-term concerns over affordability a back-end loaded plan may be more appropriate for member security than extending plan length. However, where a new valuation shows a much larger deficit, a longer recovery plan might be appropriate.

Clearance – findings in relation to applications

The level of clearance activity has been on a downward trend due to increasing industry understanding of the regulator's requirements and a decline in merger and acquisition activity.

Type of transaction is very diverse, but most activity is seen in events regarding the sale of the employer (more than 20% of cases), and company restructure (more than 15% of cases).

A wide range of types of mitigation is seen for transactions that reduce the security of the pension scheme. In more than 60% of cases this is in the form of a cash contribution.

Since the process was introduced in April 2005, 444 clearance statements have been issued, with just three refused.

Buyouts

Full buyout business totalling £8.2bn was reported in the year to 30 September 2008, almost 6 times the level for the previous year. In spite of the high profile of these transactions, this record year represented less than 1% of liabilities.

Editor's notes

1. The report is available on the Pensions Regulator's website.
2. Valuations described in this report cover the periods 22 Sept 2005 – 21 Sept 2006 ('tranche 1') and 22 Sept 2006 – 21 Sept 2007 ('tranche 2'). As such the recovery plans were for the most part set in economically benign circumstances. The financial positions described and the decisions made therefore pre-date the significant downturn in financial conditions.
   Economic factors affecting 'tranche 3' recovery plans will be very different.
3. This press release should be read in conjunction with our October 2008 statement to trustees about current financial pressures.
4. The Pensions Regulator is the regulator of work-based pension schemes in the UK, with objectives to protect members' benefits, promote good administration and reduce the risk of calls on the Pension Protection Fund. Our approach is risk-based focusing on education and enablement, with enforcement where appropriate. We have the ability to:
   • collect information about pension schemes; through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
   • issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
   • direct pension schemes as to how to calculate their liabilities and the contributions required;
   • issue a contribution notice where there is a deliberate attempt to avoid liabilities, or a financial support direction where the employer is a service company or insufficiently resourced.