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The Pensions Regulator's statement to UK employers on current market conditions
The Pensions Regulator has today published a statement targeted at employers who sponsor defined benefit pension schemes. This deals with the funding of their pension schemes in the light of current market conditions - weakening employer covenants and increasing scheme deficits. The Regulator believes the current scheme funding framework should be flexible enough to deal with an economic downturn, recognising that pension schemes are long term investments.
The main message is that the Regulator recognises that scheme funding needs to be balanced with the ability of the employer to meet contribution requirements. Any employer that has a concern that an existing Recovery Plan may be putting the future of the employer at risk is encouraged to discuss this with the scheme trustees. There is potential to renegotiate Recovery Plans as a scheme deficit should not be the cause of an employer being pushed into insolvency. The Regulator would not, however, generally be happy if this meant that the Recovery Plan was weakened whilst dividends continued to be paid to shareholders.
The Regulator suggests that back-end loaded recovery plans may be preferable to extending the length of recovery plans where there are concerns about short term affordability. In more severe cases it may be appropriate for the length of the recovery plan to be extended or indeed for contingent assets to be considered.
A copy of the Regulator’s press release and statement can be found on its website.
The Regulator’s October 2008 press release and statement targeted at trustees can also be found on the Regulator’s website.
Our view is that whilst in some respects this is a welcome development it could be viewed as a knee jerk reaction to current difficulties. It could serve as a significant disincentive to investors to put money into a business with an associated pension scheme. Their reward for doing so (the dividend) would be subordinated to the pension scheme and, from a macro perspective, this could be seen as further stifling the prospects of such enterprises.
In addition, pension schemes with equity investment may suffer as a result of this restriction as the dividends that they receive on their investments may be reduced.
Please contact your usual Barnett Waddingham contact if you would like to discuss any of the issues mentioned above in more detail.
18 February 2009