The Pensions Regulator

Regulator publishes first analysis of recovery plan data

Ref: PN07-14
26 September 2007

The extent to which trustees and employers have embraced the scheme funding regime has been revealed in an analysis of recovery plan data published by the Pensions Regulator today (Wednesday).

Key findings from the analysis, based on a dataset of recovery plans as submitted to the regulator up to the end of July and with valuation dates in Q4 2005 and Q1 2006 shows:

• a recognition amongst trustees and employers of the need to make prudent assumptions for the calculation of technical provisions  - with average technical provisions coming out close to the FRS17 accounting standard and above s179 levels;
• around one-third of plans did not ‘trigger’ further action by the regulator. Of the 70% that did trigger, a large proportion needed only minimal action (such as a request for further information or the need for clarification of points of detail with trustees);
• due regard is being paid to the regulator’s Code of Practice with schemes acknowledging the principle of reasonable affordability in their plans to eliminate deficits;
• more than 80% of schemes are producing plans no longer than 10 years in length, with an average plan length of 7.5 years; and
• mortality assumptions are predominantly based around the medium cohort.

Commenting on the analysis, Tony Hobman, chief executive of the Pensions Regulator said: “It is still early days in the Scheme Funding regime and many of the recovery plans included in this analysis are still being looked at. But it provides a useful snapshot of a dynamic and still unfolding situation that will be of interest to the wider market.

“In terms of our early observations, I would highlight four things. Firstly, it is important to stress once again that our triggers – for instance on recovery plan length – are not targets. All recovery plans should be set on a scheme specific basis and are considered by us on that basis. Secondly, it is clear that the longevity assumptions we have seen have not yet reflected the recent debate on what might be considered prudent. We would expect future plans to take into account recent arguments for strengthening assumptions.

“Thirdly, we have begun to see some failures to agree. We take this issue very seriously and will not hesitate to use our powers if necessary. Finally, we have been concerned about a trend for some schemes to notify us at the last moment that they will be late in submitting their plans.

”But, taken on balance, I believe that our analysis shows that trustees and employers are embracing the new funding regime.”

The analysis also highlights:

• how the regulator’s ‘triggers’ have been used to prioritise plans requiring further action;
• the range of investment return assumptions being made by schemes;
• the variability of pre- and post-retirement discount rates being used; and
• the economic context in which the schemes underwent their valuations.

Editor's notes

1. The new funding regime for defined benefit pension schemes, under Part 3 of the Pensions Act 2004, came into force on 30 December 2005. This regime replaced, and was a radical departure from, the highly prescriptive Minimum Funding Requirement (MFR) of the previous Pensions Act 1995.  It is designed to be phased in over a period of about three years to synchronise with when an MFR valuation would otherwise have been due.
2. All pension schemes with a deficit are required to submit a recovery plan to the regulator setting out how the deficit is going to be eliminated.  Schemes set out how quickly the deficit will be paid off (known as the recovery plan length) and, in an accompanying valuations summary, state the assumptions on which they have calculated the value placed on their liabilities (their Technical Provisions).
3. This analysis is based on data taken from recovery plans (and valuation summaries) as they were received by the regulator and does not necessarily represent how the data would look after recovery plans passed through our trigger process and we had engaged with schemes.
4. The data should not be interpreted in any way as indicating what the regulator views as ‘acceptable’. All recovery plans should be set on a scheme specific basis and are considered by us on that basis.
5. Assumptions underpinning the recovery plans included in this analysis will reflect the economic situation and business climate at the time that the scheme valuations took place (ie Q4 2005 and Q1 2006).
6. In line with our risk-based approach all recovery plans submitted to us are passed through a number of triggers that help us to focus our resources on those plans most likely to require further consideration.
7. These triggers are as follows:
8. • Technical Provisions – there is one trigger set at a point between the value of liabilities in accordance with the employer’s accounting standard (either FRS17 or IAS19) and the value placed on the PPF level of compensation benefits for levy purposes (section 179). The precise point in the range will vary between schemes depending on the maturity of the scheme and the strength of the employer covenant.
   • Recovery plans – there are three triggers that will filter a plan for further review:
   • • Period of the plan is longer than 10 years; and/or
     • the plan is excessively back-end loaded; and/or
     • the investment return assumption over the life of the plan appears to be inappropriate.
9. Our published guidance makes clear that these triggers are not targets. We expect trustees to give primacy to Technical Provisions (i.e. we expect schemes to agree prudent Technical Provisions even if that leads to a longer recovery plan).
10. The Pensions Regulator is the regulator of work-based pensions in the UK, with wide-ranging and flexible powers under the Pensions Act 2004. The Pensions Regulator's powers include the ability to:
    • collect detailed scheme information;
    • issue improvement notices and third party notices, enabling the regulator to ensure problems are put right;
    • freeze a scheme that is at risk while the regulator investigates;
    • disqualify trustees who are judged not fit and proper to carry out their duties; and
    • issue a contribution notice or financial support direction.