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This update covers the scheme funding framework, robust technical provisions, flexible recovery plans, risk transfers, and the approaches taken by the TPR in funding cases. Learn what you can do to navigate these issues effectively.
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Regulatory update on funding issuesFiona FrobisherOctober 2009
Agenda • Scheme Funding Framework • Robust Technical Provisions • Flexible Recovery Plans • Risk Transfers • TPR’s approach to cases • What you can do
All schemes must perform a triennial valuation The process for trustees takes up to 15 months …ROUND 1… ROUND 2… Tranche 1 schemes 22/9/05 – 21/9/06 Recovery Plans Dec 06 – Dec 07 Tranche 1 schemes 22/9/08 – 21/9/09 Recovery Plans Dec 09 – Dec 10 Tranche 2 schemes 22/9/06 – 21/9/07 Recovery Plans Dec 07 – Dec 08 Tranche 2 schemes 22/9/08 – 21/9/09 Tranche 3 schemes 22/9/07 – 21/9/08 Recovery Plans Dec 08 – Dec 09 …DEALT WITH… ...CURRENT… …FUTURE… Sept 05 Sept 06 Sept 07 Sept 08 Sept 09 Sept 10
And many employer covenants have weakened: Real GDP quarterly growth: Source ONS
Robustness versus flexibility • Technical provisions: • must be robust; • need to reflect the situation as it really is, not as we may like it to be. • However: • Recovery plans can be flexible if needed.
Assumptions and employer covenant High Strong Some Covenant Risk level of assumptions Prudence Little or none Low Weak
Employer covenant • Employers legal obligation, ability and willingness to support the scheme • Employer stands behind payments to cover: • ongoing payments; • appropriate scheme expenses • deficit repair; • underperformance
TPs + covenant = self-sufficiency Technical provisions Assets RP Employer Covenant Self-sufficiency level of funding
TPs + covenant = self-sufficiency Technical provisions Assets RP Employer Covenant Self-sufficiency level of funding
Flexibility in recovery plans Recovery plans should reflect what is possible and reasonably affordable….. • but members should not be disadvantaged by terms of plan Considerations for flexibility • Additional security to support longer plans • Contingent assets • Parental guarantees • Back-end loading • Step up payments once cash constraints cease • Agree profit share over and above flat rate payments
Example of a flexible recovery plan Deficit = £14 million Company cash-constrained; reasonable expectations of recovery in year 4. Payments £1 million yrs 1-4 Payments £1.5 million yrs 5-8 Payments £2 million yrs 9-10 In addition: If company reaches certain triggers e.g. profit of over £1 million a year it will pay 25% profit a year to pension scheme.
The regulator’s role in management of pension risk transfer We welcome innovation in the market but our focus remains on protecting member benefits and reducing calls to PPF • Such transitions can introduce new risks • Where risk is transferred to another entity need to ensure no reduction in member security • Where risk is transferred to individual member need to be properly informed of risks and costs • Rather than a risk transfer being a one-off, often part of a phased/ blended solution
TPR approach to funding cases • Work with employers, trustees who need to revise recovery plans • Where recovery plans trigger we will be particularly concerned by those that show a drop in prudence • Welcome recovery plans with additional security • We are happy to discuss issues around corporate transactions, the earlier we are involved in the process the more we can help • We have powers – but most cases are settled before they are used
What you can do: Work with the trustees: • Understand your position • Communicate openly • Start early • Ask the right questions