Regulation  

DB deficits likely to rise in ‘extremely challenging’ 2015

DB deficits likely to rise in ‘extremely challenging’ 2015

Many defined benefit schemes are likely to experience larger deficits than at their last triennial valuation due to changing market conditions, according to The Pensions Regulator’s annual funding statement.

Published today (22 May), the annual funding statement added that schemes with capacity to take additional risks should be able to address higher deficits through appropriate changes to their funding strategy.

This could include modest extensions to their recovery plans, increases in deficit repair contributions, or changing assumptions relating to investment returns.

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Those schemes with less capacity for risk should seek higher contributions with a view to maintaining the same recovery plan end date, where this is affordable to the sponsor without adversely impacting its plans for sustainable growth.

Stephen Soper, executive director for defined benefit at TPR, said the latest statement should give confidence to employers that supporting DB schemes is not a barrier to investing in their business.

“The strong performance of all asset classes during improved economic conditions have benefited pension funds. But persistent low interest rates and falling gilt yields mean that it remains a very challenging environment for DB schemes with 2015 valuation dates.

He noted that the DB funding regime is designed to be flexible enough to enable trustees and employers to agree funding strategies which meet the scheme’s funding requirements without compromising the ability of the employer to invest in their business and support the scheme in the long term.

As part of its work to help trustees understand the DB funding code, the regulator is planning to publish, in the coming months, practical guidance on assessing the sponsoring employer’s ability to support the scheme, an integrated approach to managing risk and setting an investment strategy.

Helen Forrest, DB policy lead at the National Association of Pension Funds, pointed out that the statement recognises the detrimental effect of long-term low interest rates on scheme deficits.

“These conditions increase the appetite of funds for assets that match their long-term, inflation-linked liabilities and we believe it is critical the government supports pension funds by ensuring a suitable supply of such assets, including the provision of a pipeline of infrastructure projects with a risk-profile that makes them an attractive investment opportunity for pension funds.”

Gareth Connolly, chair of Institute and Faculty of Actuaries’ pension board, agreed that market conditions for 2015 valuations are “extremely challenging” in comparison to 2014 and are likely to place additional demands on sponsors.

“Our members, whether advising trustees or sponsors, will continue to assist the development of risk management frameworks to balance the continuing need to protect members’ benefits and the ability for sponsors to pay.”

peter.walker@ft.com