Regulator's 2009 recovery plan report shows how schemes are coping in the downturn

The Pensions Regulator today published the latest edition of its annual analysis of recovery plans from defined benefit and hybrid pension schemes. This analysis updates previous publications in 2007 and 2008, providing an overview of scheme recovery plans with valuation effective dates from 22 September 2005 to 21 September 2008. This represents the first near complete triennial cycle of the regulator's scheme funding regime – with schemes divided into three 'tranches' based on the effective date of the scheme valuation.

Pensions Regulator chair, David Norgrove said: “The three tranches of scheme valuations have been conducted in very different economic circumstances and this analysis explores some of the effects that the downturn, and other factors such as longevity improvements, have had on scheme funding.

“We urge trustees to continue to take a prudent approach to assessing schemes' technical provisions, to maintain an honest and open dialogue with employers, and to remain aware of the changing economic situation as they focus on the long term interests of scheme members. The regulator will continue to focus on this shared goal.”

Some of the key findings are:

• We have not seen a material increase in schemes triggering our scrutiny on technical provisions (funding targets) over the last two tranches. This reflects in part technical factors affecting the trigger calculation.
• We have seen an increase in both recovery plan lengths and back-end loading. This resonates with the regulator's statement on the employer covenant in June, emphasising the flexibility in our funding framework where employers face short-term cash constraints.
• Mortality assumptions have demonstrated greater prudence in response to evidence of increasing longevity and our regulatory guidance. Schemes have moved towards the use of baseline mortality assumptions which reflect more up-to-date mortality experience in combination with adjustments which allow for future mortality improvements and an underpin.
• There has been an increase in the mean effective single discount rate adopted in the third tranche, reflecting increasing reliance on future investment returns. We will continue to monitor developments in this area, and in particular it should be noted that the data predates market activity in late 2008 and early 2009.
• The proportion of tranche 3 recovery plans that triggered was 60 per cent, compared with 70 per cent and 52 per cent in tranches 1 and 2 respectively.
• The weighted average recovery plan length was 8.3 years for tranche 3 schemes, up from 6.1 years for schemes in tranche 2.
• From tranche 2 to tranche 3, the proportion of recovery plans that triggered solely on technical provisions was lower.
• There has been an overall reduction in the number of clearance applications in the financial year 2008-09 from 2007-08.

1. The report is available on the Pensions Regulator's website.
2. The report covers the valuation effective dates for recovery plans from 22 September 2005 to 21 September 2008.
3. The recovery plan data is divided into three tranches, based on the valuation effective dates of the recovery plans. The three tranches were set in very different economic conditions, and we explore the impact of the different economic factors on scheme funding and the assumptions employed. It is to be noted that recovery plans received after 31 July 2009 in respect of the 1st triennial cycle are not included in this analysis.
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:
5. • 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 an attempt to avoid liabilities, or a financial support direction where the employer is a service company or insufficiently resourced.

Katherine Long 01273 811859
Ben Lloyd 01273 627208
Ruth Hallam 01273 627752
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www.thepensionsregulator.gov.uk

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