Budget 2013: The government has tasked The Pensions Regulator (TPR) with a new objective to support defined benefit (DB) pension scheme funding arrangements, which are compatible with sustainable growth for the employer and fully consistent with 2004 funding legislation.
The precise wording of the new objective will be set out in legislation that the Department for Work and Pensions (DWP) will publish later in spring 2013.
The implementation of the objective will be subject to review after six months, and TPR will revise its code of practice to reflect the new objective as soon as possible in 2013.
The government is also consulting on a new growth duty for non-economic regulators and is attracted, subject to the results of the consultation, to applying such a new duty to TPR.
Michael O’Higgens, chairman of TPR (pictured), said: “In light of the government’s proposal for a new objective to take account of the sustainable growth plans of the sponsoring employer, we will make the changes required, building on the 2004 funding regime, as part of a review of the code of practice for defined benefit funding that we will launch as soon as possible this year.
“In addition, we will shortly publish an annual funding statement, which will set out our guidance to trustees in the context of current economic circumstances, including the flexibilities available to trustees and company sponsors in the current regime, particularly the freedom to choose the basis on which contribution levels and valuations are calculated.
“We will engage fully with stakeholders and the industry on both the revision of the code of practice and the next annual funding statement.”
Joanne Segars, chief executive at the National Association of Pension Funds (NAPF), added: “We have long been calling for a new statutory objective for The Pensions Regulator to help secure the future of pensions, so we are pleased with today’s announcement.
“We back the broader focus of the objective and look forward to seeing more detail. The new objective needs to strike the right balance between protecting savers’ interests, helping good defined benefit pensions remain open, and ensuring pension regulation does not hinder investment and growth. We will be keeping a close eye on how the regulator meets this new goal.”
The introduction of a new statutory objective for The Pensions Regulator to support scheme funding arrangements that are compatible with sustainable growth for the sponsoring employer is unlikely to fundamentally alter the way trustees and sponsors negotiate the level of recovery plan contributions.
However, sponsors may take comfort from the formalisation of the idea that their plans for continued growth have a part in scheme funding negotiations. To the extent that the objective alters the balance of power in setting recovery plans, there will be a need for trustees and sponsors to ensure that the processes surrounding agreement and ongoing monitoring of the scheme’s recovery plan are robust.
TPR will issue further detailed guidance in its annual funding statement shortly.
Greater flexibility will inevitably be welcomed. However, additional flexibility should not come at the expense of robust funding and investment risk management.
In future, this means that The Pensions Regulator will need to consider the affordability of pension contributions for the sponsor, as well as the security of members and the potential impact of any decision on the pensions lifeboat, the Pension Protection Fund.
We should expect a consultation on the precise wording of this new objective later this spring. The objective will, unusually, be subject to review after six months.
The Budget papers also say that: ‘The government is also consulting on a new growth duty for non-economic regulators and is attracted, subject to the results of that consultation, to applying such a new duty to TPR.’
It is unclear what form this will take. But the one idea from the Autumn Statement that won’t be taken forward is the plan to allow smoothing of the discount rate, as the call for evidence ‘did not reveal a strong case’ for change.