Pension funds given flexibility over funding

 
Michael Bow
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BUSINESSES will be given greater flexibility over the valuation of assets they use to fund their pension scheme deficits amid a looming crunch on pension financing, under new plans unveiled by the industry watchdog yesterday.

The Pensions Regulator (TPR), which oversees how defined benefit schemes are funded, said that firms will be given some flexibility over how they assess the expected return on assets such as equities and bonds – held by pension schemes as investments – to reflect market conditions.

“Our starting point will be that schemes should consider whether to maintain present levels of deficit contributions as agreed at the last valuation. But some employers will struggle to pay that level of contributions – and may need to make use of the flexibility within the system,” said TPR chair Michael O’Higgins.

It comes as figures show half of pension schemes with valuations this year could stay in deficit for five years longer than originally expected, with one in ten requiring more than two decades to get out of the red.

Such deficits put pressure on businesses that support schemes, as they have to divert vital funds away from business development and employing people to fill in the pension scheme shortfall.

Graham McLean, senior consultant at Towers Watson, said: “This change in tone may make trustees think the regulator is less likely to back them if push comes to shove and may embolden employers to stand their ground.

“However, schemes already knew that the regulator had yet to wield its power to impose funding settlements and would only seriously consider using it as a last resort.”

TPR, which publishes its annual funding statement every year to help guide companies on funding pension schemes, is set to receive a new statutory objective from the government this year.

The objective is set to make sure funding requirements are compatible with economic growth.