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By Donia O'Loughlin | Published Apr 27, 2012

Regulator rejects calls to allow for effects of QE

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Defined benefit pension schemes should be able to meet promises to members with no change or only small changes to their present deficit recovery plans and without the need for ‘imprudent’ allowances to be granted for the effects of quantitative easing, the Pensions Regulator has said.

The statement is made in guidance, published today (27 April), aimed at trustees and employers of defined benefit pension schemes which are undertaking their scheme valuations with effective dates in the period September 2011 to September 2012.

The Pensions Regulator said the guidance applies to approximately one third of the UK’s 6,500 DB schemes, and about 4m of the 12m DB memberships, but it is relevant to all trustees and employers with a DB pension scheme.

It said trustees and employers that follow the guidance in the statement are more likely to reach funding agreements that the regulator finds acceptable without the need for regulatory involvement.

In the report, the regulator says it expects current deficit recovery contributions should be maintained in real terms and said it will seek strong justification where a reduction is proposed.

The regulator estimates that a significant majority of employers of schemes in deficit will not need to make changes to their existing plans, or will only need to make small increases to their deficit recovery contributions and length of recovery plans.

There have been calls for the regulator to allow schemes to make an allowance for low gilt yields and the effect of quantitative easing in the assumptions they use, thereby reducing their funding target.

However, the regulator says it does not believe it is a prudent approach to second guess future market conditions, though it says it will consider “additional flexibility” in recovery plans where employers are genuinely struggling to support their scheme.

Bill Galvin, chief executive at The Pensions Regulator, said: “There are a number of economic factors impacting gilt yields, such as QE and demands for UK sovereign debt from the international banking sector.

“The net effect across defined benefit schemes is not uniform and will vary greatly depending upon the extent to which their risk-management, investment and contribution strategies have insulated them from the effects.”

Joanne Segars, chief executive at the National Association of Pension Funds, said: “Tough economic conditions, QE and falling gilt yields have been causing a huge headache for companies providing defined benefit pensions, many of whom have seen their pension deficits go up significantly.

“While the regulator’s statement is helpful, we hope that its dealings with pension funds and their employers are consistent with what it has outlined. Ultimately, the proof of the pudding will be in the eating.”

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