Pensions Regulator predicts larger DB scheme deficits in its 2015 funding statement
The Pensions Regulator warns that many schemes currently undertaking a scheme funding valuation are likely to experience larger deficits than at their last triennial valuation due to changing market conditions.
The 2015 funding statement sets out the Regulator’s analysis of current market conditions and how sponsoring employers and trustees of DB schemes can agree appropriate funding plans for schemes with valuation dates between 22 September 2014 and 21 September 2015.
The Regulator notes that despite all major asset classes having performed well and schemes having paid £44bn in deficit repair contributions over the last three years, many schemes with 2015 valuations will have larger funding deficits due to the impact of falling interest rates and schemes not being fully hedged against this risk. It also notes that compared to previous years, market expectations are for interest rates to remain lower for longer and to revert to lower long-term levels than previously thought, which has significant implications for scheme funding strategies, especially for those that factored in a degree of “gilt reversion”.
The Regulator suggests that:
- Schemes with capacity to take additional risks should be able to address higher deficits through appropriate changes to their funding strategy – such as a modest extension to their recovery plans, a modest increase in deficit repair contributions and/or changing their assumptions relating to investment returns
- Other schemes with less capacity to take risk should seek higher contributions with a view to maintaining the same recovery plan end date. Where constrained affordability results in lower deficit recovery contributions than trustees think the scheme needs, they should maintain a higher level of due diligence and put in place strategies for managing the risks to the scheme, such as obtaining additional security, seeking contributions from alternative sources or structuring the recovery plan differently
Under the heading of “Recent developments” the Regulator points out:
- The importance of monitoring funding levels after the valuation date, both whilst the funding plan is being finalised and beyond
- The need to consider funding, investment and cash flow issues, if there is any pick up in DB to DC transfer payments resulting from the newly available DC flexibilities
Separately, as part of its work to help trustees understand the DB funding code, the Regulator is planning to publish, in the coming months, guidance on assessing the sponsoring employer’s ability to support the scheme (covenant), an integrated approach to managing risk, and setting an investment strategy.
Comment
This is a very balanced statement from the Regulator that acknowledges the challenges that will be faced by many trustees settling their valuations this year and which is very firmly rooted in the language of the revised DB funding code published last year.
Queen's Speech – all quiet on the pension front?
The first Queen’s Speech of the Conservative Government was delivered on Wednesday with little in the way of proposals that will directly impact workplace pension schemes.
The Queen confirmed that the Government will maintain the “triple lock” of pension increases on the Basic State Pension (the greater of 2.5% and both wage and price inflation), for the duration of this Parliament.
Other measures include:
- A Bill to devolve wide-ranging powers to Scotland, including the ability to set the thresholds and rates on income tax on earnings in Scotland
- A referendum on membership of the European Union before the end of 2017; and
- No rises in income tax rates, VAT rates or national insurance contribution rates for the next five years
Further detail is set out in a Cabinet Office Briefing Note which confirms that the income tax personal allowance is to rise to £12,500 pa over the course of this Parliament, but with increases reflecting changes to the national minimum wage, so that those working 30 hours a week on the national minimum wage do not pay income tax. It also states that the Government will continue to protect pensioner benefits, including winter fuel payments, free bus passes, TV licences, and free prescriptions.
Comment
Whilst on the face of it workplace pensions have escaped major change, the devolution of powers to Scotland, particularly on taxation, could cause major headaches for pension schemes. And there are already plans for a Budget on 8 July that is likely to see the Lifetime Allowance reducing and quite possibly early action on the Annual Allowance for the highest earners (see Pensions Bulletin 2015/22).
Lord Bradley confirmed as shadow pensions minister
The Labour Party has confirmed that Lord Bradley will succeed Greg McClymont as the official Opposition’s spokesperson on pensions. Keith Bradley is a working life peer in the House of Lords and has been the shadow spokesperson for health and for work and pensions in the Lords since 2013.
The move will mean that both the pensions minister and Labour’s shadow will sit in the House of Lords, following the decision to ennoble Ros Altmann and appoint her as Minister of State for Pensions (see Pensions Bulletin 2015/21).
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
