The Pensions Regulator (TPR) has recently published a quick guide for employers on its code of practice on funding defined benefits.
The guide, which is accompanied by a short video, highlights key points for employers approaching valuations with effective dates from 29 July 2014 onwards:
- the employer’s role in supporting the scheme
- working with trustees in an open and transparent manner
- trustees’ responsibilities regarding the employer covenant and risk management
- setting an appropriate funding strategy which enables an employer to continue to invest in its business
- challenging market conditions potentially leading to increased deficits
The publication of this guide shows that TPR is keen to encourage employers to get involved in pension scheme funding. In many cases employers will have had a reactive role in negotiating contributions, or discussing covenant, every three years. We would encourage employers to be proactive and work with trustees at every step. Not only could this lead to easier funding negotiations, but employers need to have an in depth understanding of the risks they face in sponsoring a defined benefit pension scheme. Collaborating with trustees to manage these risks can have big pay-offs for the employer’s own business risk management.
Some employers may be concerned about providing trustees with commercially sensitive information, particularly for example in non-associated multi-employer schemes. TPR has highlighted this to trustees as a potential issue in its practical covenant guidance and suggested solutions such as confidentiality agreements, or the use of sub-committees.
TPR recognises that a strong employer, together with an appropriate funding plan, is the best backing for a scheme. We are happy to see TPR’s continued focus on recognition of the employer’s need to invest in its business, driven in some small part by its own new objective to minimise any adverse impact of the funding regime on the sustainable growth of an employer. Still, employers will need to prepare for a greater degree of scrutiny of their business plans as trustees get to grips with the revised Code of Practice.
"Collaborating with trustees to manage these risks can have big pay-offs for the employer’s own business risk management"