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27 October 2008

The Pensions Regulator issued a "Statement to trustees about current financial pressures" on 24 October 2008, which sets out his position concerning both defined-benefit (DB) and defined-contribution (DC) schemes in current market conditions.

For DB schemes, the Regulator emphasises current causes for concern are likely to be the general fall in asset values along with emerging pressures on employer covenants, with few schemes being affected by "toxic" asset classes.  He indicates it is important trustees keep their employer covenant under review and consider whether their existing processes in this area are adequate.

The Regulator adds that, where an employer believes an existing recovery plan is at serious risk of jeopardising the company's future development or solvency, that will be a matter for discussion with the trustees.  The trustee board will wish to consider carefully any proposal for change, taking into account among other things plans for payments to other creditors and dividends to shareholders.  Where a revision to the recovery plan is agreed, the Regulator must be informed.

For trust-based DC schemes, the Regulator indicates trustees may want to give careful consideration to current member communications and consider the position of members who are at particular risk in the current economic conditions.

Comment:

Trustees may naturally be feeling nervous about their employer's covenant along with increases in their scheme's deficit as a result of falling asset values and so may be tempted to ask for higher contributions to alleviate this concern.

On the other hand, employers may be wary of trustees asking for higher contributions at precisely the time when they may least be able to afford them.

Pension schemes are long term by nature and so any short-term knee-jerk reactions to the current economic climate that could have unwelcome consequences should be avoided.  It is important that trustees and their employers maintain open dialogue and ensure they strike a balance between scheme funding levels and employer viability.

The Regulator's reference to DC schemes brings into sharp focus his guidance on member retirement options (issued in May 2008), which indicates schemes should have an appropriate process in place to convert DC funds into retirement income.

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