New rules on scheme funding from the Pensions Regulator, must be flexible and pragmatic enough to reflect the long-term nature of pension scheme funding, claims the National Association of Pension Funds (NAPF).
In its response to the Pension Regulator’s consultation on scheme funding, which closed on 26 January, the NAPF says the Statutory Funding Objective will be a major determinant of whether employers will continue to support defined benefit (DB) arrangements and could also have a much wider impact on UK competitiveness and productivity.
The consultation set out main proposals for the regulation of scheme funding, the first are the technical provisions, or funding target of a scheme, and the second is the setting up of a recovery plan for any shortfall in the funding, which in theory should be paid off as quickly as possible.
These two proposals also act as triggers for the Regulator to look closer at a scheme’s funding level and if necessary intervene. The technical provisions, which include a funding target specific to the scheme, also require a full assessment of the buy-out solvency of the scheme.
The technical provisions are then expressed as a percentage of the full buy-out cost and compared to a set range established by the Regulator. Where it comes on the range will determine whether the Regulator needs to take a closer look at the scheme.
Recovery plans are the second trigger, as the idea Is to pay off any shortfall as quickly as possible, so any plans longer than 10 years would trigger a closer inspection by the Regulator, as would any plans which are shorter than 10 years, but which could be paid back sooner.
The NAPF says it supports the idea of using triggers to identify schemes requiring further scrutiny, but questions the use of a “percentage of buy-out cost” as a funding filter and urges flexibility in the application of the ten year recovery period.
Christine Farnish, chief executive of NAPF, says: “The use of filters is sensible and pragmatic. But we need to make sure the right triggers are used. They should bear a relation to the statutory funding objective, not buy-out or Financial Reporting Standard 17 (FRS!&) levels.”
She adds that NAPF have proposed an alternative funding filter, based on the discount rate adopted or the funding plan, which would approach the issue of funding strength and risk more directly.
NAPF also urges a more flexible approach to recovery periods, arguing that while a 10 year trigger may be reasonable for the first cut, NAPF hopes the Regulator will look at scheme member profiles and consider average working lifetime of active members in reaching a view.
Christine Farnish adds: “The Regulator has so far demonstrated its willingness to engage positively with the industry and to take account of vies and concerns of pension schemes and their sponsors.”
“How scheme specific funding is implemented will be a crucial test of the Regulator’s commitment to help ensure that remaining DB schemes are not further damaged by an over-zealous regulatory environment,” continues Farnish.
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