The Pensions Regulator is inviting employers to comment on the mechanisms that it is proposing to put in place to alert it to defined benefit (DB) schemes that are at risk on funding.
Under the Pensions Act 2004, DB schemes must have sufficient and appropriate assets to provide for liabilities and a recovery plan to clear any deficit. The regulator may have cause to intervene where this is not the case and has drawn up a consultation document called How the Pensions Regulator will regulate the funding of defined benefits setting out when it may do so.
In monitoring schemes, the regulator proposes to look at the funding target of the scheme and whether this is reasonable bearing in mind a number of factors, including the value placed on the scheme’s liabilities in the company balance sheets under FRS17. It will also pay regard to the length of the recovery plan, and where it exceeds ten years this will be used as a trigger.
But Aaron Punwani, partner and head of trustee consulting at Lane Clark & Peacock, said: “The existence of the triggers could in some cases result in less prudent funding decisions.” In particular, he said that schemes could be put under pressure by sticking to the ten-year plan.
However, Charlie Massey, strategic development director at the regulator, said that affordability plays a part and admitted that in some cases schemes may need more than ten years to clear a deficit. He said: “There will be circumstances where schemes trigger our attention but where we will decide it is not appropriate to intervene because of the circumstances of the scheme and/or the circumstances of the employer, how we will respond will vary on a case by case basis.”
The consultation will end later this month and a formal statement on the regulator’s regulatory approach and use of powers will be published in early 2006.