Sackers’ Response to Pensions and Growth A Call for Evidence by the DWP

Background

The Call for Evidence by the DWP on “Pensions and Growth” asks whether there is a need for:

• legislation to explicitly allow the ‘smoothing’ of asset values and liabilities in funding valuations (i.e. averaging asset prices and discount rates over a longer period of time, instead of using current market spot rates) in order to counter the effects of the current economic situation; and
• a new objective for TPR to consider the long-term affordability of deficit recovery plans to sponsoring employers to add to the current recognition of this in TPR’s code of practice on “Funding defined benefits” (the Code).

In this response:

• Smoothing of assets and liabilities
  
• New statutory objective for TPR
  

Smoothing of assets and liabilities

The issue of smoothing assets and liabilities is, we believe, a technical one requiring detailed actuarial input.  We have made no comments on this issue.

New statutory objective for TPR

The Call for Evidence also asks whether a new objective should be introduced for TPR to consider the long-term affordability of deficit recovery plans to sponsoring employers.

We note, firstly, that there is current recognition of the requirement of reasonable affordability in the Code.  The current requirement, in relation to recovery plans, is that trustees “should aim for any shortfall to be eliminated as quickly as the employer can reasonably afford”.  Our experience is that the issue of affordability is considered carefully in discussions between trustees and sponsoring employers, and is factored into recovery plans.  We therefore consider that there is sufficient flexibility within the existing regime, provided this is applied appropriately by TPR.

Second, as noted in the Call for Evidence, “the best security for a defined-benefit pension scheme and its members is a properly-funded scheme backed by a solvent, profitable sponsor”.  Having such sponsor support, a pension scheme is more likely to be able to pay out pensions in full to all members.  Security of members’ benefits is therefore a key concern of the trustees and, on this point, the trustees’ and TPR’s objectives are aligned.

Third, any new objective imposed by legislation needs to be interpreted in the context of TPR’s existing objectives.  A new objective specifically to consider the long-term affordability of the recovery plan for employers could be taken as indicating that it was in some way different and potentially at odds with the existing objectives (particularly the objective of protecting benefits).  We think this would be an unfortunate outcome, because first it could potentially undermine the flexibility of “reasonable affordability” and secondly it could set employer profitability against the provision of benefits.

Fourth, we are concerned about enforcement of an affordability objective.  The possibility of affordability being one of TPR’s specific statutory objectives may require additional TPR resources and additional powers for enforcement, for instance in relation to covenant assessment and information gathering.  It also raises the possibility that TPR may enter into direct conflict with trustees.  Alternatively, would TPR seek to extend its powers under section 11 of the Pensions Act 1995 so that it could wind up a scheme on the grounds that TPR considered it to be unaffordable in the long-term for the employer?

For all these reasons, we do not consider that creating this additional objective is either necessary or desirable as a means of improving schemes’ funding positions.  An alternative approach may be for TPR to give further guidance on affordability in the Code and guidance on scheme funding.