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Gerald Smith comments on the relaxation of the rules for 300 pension schemes

27 April 2012

In Brief:

"The Pensions Regulator is to relax the rules governing 300 UK company pensions to help deal with funding shortfalls."

Taken from the BBC website 27 April 2012. Click here to view in full

FRP Advisory comments:

As trustees of defined benefit pension schemes will be aware, this is not the first time that the Pensions Regulator has had to provide guidance to trustees on how they should address the problem of an employers ability to service pension scheme obligations during this bout of economic gloom. Pragmatism has been the "watch word" for Trustees to ensure the survival of the employer, thereby protecting the members' benefits.

However in applying such pragmatism, the regulator has made it clear that it will need to be satisfied that the basis for the Trustees' decision making, as regards calculating technical provisions and deficit repair contributions, is underpinned with sound and well documented assumptions. This will require the Trustees to have both a full understanding of their pension schemes'  financial requirements and, equally importantly, the business dynamics of the sponsoring employer.  The regulator is clearly concerned that if Trustees seek to place too greater demands on employers already weakened by the current economic climate, this could result in the financial collapse of those businesses.

As a consequence the Trustees will need to ensure that they have a full understanding of their employer's business, its needs for cash for working capital and investment and its medium term strategy, if they are to be fully briefed for the pragmatic decisions that they may be required to make. To this end it is likely that there will be an even greater emphasis on trustees seeking advise on the employers' covenant, which has long been advocated by the regulator, albeit not yet universally adopted.

Unfortunately the consequence of QE is not the only issue for pensions schemes at present. Problems associated with longevity have been around for some time, but there are other new issues to consider too, for example the consequences of recent case law regarding FSD's which has certainly caused banks to carefully reconsider their approach to funding corporates with defined benefit pension scheme. It seems that until there is a real and prolonged upturn in the economy the problems of dealing with defined benefit pension schemes for trustees and employers alike are set to continue.

Gerald Smith, Partner at FRP Advisory

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